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

Is The Worst Stock Market Week In Two Years A Sign Of Things To Come?

Top Of Mind...

There is almost too much to cover from this past week:

Earnings season.
State of the Union Address.
January Jobs report.
Housing report.
The worst week for stocks in more than 2 years.
Groundhog Day.

I won't cover them all, but I do want to give my thoughts on what was the worst-performing week for the U.S. stock market since Jan. 2016. It was an ugly week all around. Most stocks were down. Bonds were down. There were few places to hide. The S&P 500 tumbled -3.8%, losing half of the previous 2018 gains that occurred in January.

Is this the beginning of the big market decline that those who have been sitting on cash for years have been waiting for? Unlikely. Could we see more losses next week and the week after? Entirely possible. But here is some perspective, consider the following:

  • Dating back to Aug. 2017 the S&P 500 index had gained approximately +18% coming into this past week. As bad as the past few days were, only one-quarter of that rally was lost.
  •  A week like this was somewhat inevitable. If you have seen some of the statistics I have shared here in recent weeks, stock price momentum was unusually high, dating back two generations.
  • It is a minor consolation, but two of the stock sector funds we own -- Utilities and Financials -- had the slimmest losses among all major sectors.
  •  In the case of the Financials sector fund we own, I still believe that is among the strongest areas of the market. More often than not, the strongest sectors are the ones that lead when the market rebounds.
  • The long-term trend of the broad stock market remains up. Of course that could change, but for now these pullbacks represent buying opportunities more than selling opportunities.

That last point is the most relevant one. We have seen virtually no market volatility since the Summer of 2016 -- and that is being generous. We really haven't seen market volatility since late-2015. Back then I viewed downswings with more of a defensive mindset than I do right now, simply because market conditions were much worse then compared to today. Whereas I looked to sell in 2015 I look at these pullbacks as opportunities to buy.

There is some bad news, of course, given that the market did slide nearly -4% this week. I detail that below in my MARKET commentary.

Seattle's lead in real estate shrinks: Housing prices nationwide rose an average of two-tenths of one percent in Nov. 2017. Prices have risen +6.2% annually. Seattle homes have appreciated +12.7% in the past year, which is still tops among the 20 major U.S. cities tracked, but that lead has narrowed. Las Vegas is closing the gap, where homes have risen +10.6% annually. San Francisco had the largest monthly gain, up +1.4%. A higher-than-usual number of cities (8 of 20) had price declines.

Here is a city-by-city look at the S&P/Case-Shiller housing report:

Despite prices falling in nearly half of the cities tracked, this report was pretty decent considering the time of year. These numbers are not adjusted for seasonality, so it is nice to see any gains whatsoever during the winter months. I am very eager to see whether this upcoming Spring real estate season in Seattle will be as hot as recent years.

To briefly touch on the other topics mentioned in the lead: The January unemployment rate held at 4.1% for the third-straight month... Earnings season had its biggest week yet, as Amazon, Google, Facebook, Apple and many others reported fourth-quarter results. I'll recap earnings season in a future post... I passively listened to President Trump give an uncharacteristically mellow State of the Union address.... And apparently Punxsutawney Phil saw his shadow, which means six more weeks of winter. Or for Seattle, just another February.

In The Market...

The S&P 500 fell -3.8% this past week. Here is how the individual sectors performed:

(price data via stockcharts.com)

It is nothing but a sea of red in the above image. Every sector was negative, as were each of the major bond categories. The latter is what makes this somewhat unique and concerning. Oftentimes investors will sell stocks to buy bonds, as a means of migrating to safety. Here, both stock and bond investors hit the sell button and moved to cash. Rising interest rates and falling stock prices is a bad combination that often leads to choppy weeks ahead. This alone makes the events of the past few days something to watch. One week does not make a trend, nor break an existing one, so we will just have to monitor how investors behave over the next few weeks while leaning on our process.

Two weeks ago I highlighted that long-term interest rates might finally be primed to spike. In those two weeks the 10-year Treasury yields has jumped from 2.64% to 2.85%. That Treasury rate is closing in on 3.00% for the first time since 2013.

In the short-term I think interest rates pause a bit either now or when 3.00% is reached. The long-term view suggests that the days of ultra-low rates may finally be over. Keep an eye on the below chart. If that falling trend (red line) is broken -- meaning that the 10-year Treasury rate jumps above that level -- bond investing will become more challenging in the months ahead (remember, bond values and bond interest rates move opposite one another).

Let's end on a positive note... The S&P index gained +5.6% in January. Not only was it the 10th-straight monthly gain for U.S. stocks, but it was also the best monthly return for the S&P since March 2016 and the best January to start any year since 1997. So there you go.

In Our Portfolios...


Q&A/Financial Planning...

As you start thinking about completing your taxes for 2017, a quick reminder about IRA contributions before you do.

If you have not maximized your IRA contributions for 2017 but would like to, do not complete your taxes until you have made that contribution. Many of you will be ineligible to make Traditional IRA contributions if you are already participating in a company 401k (or similar) plan. Some of you are eligible to make Roth IRA contributions, provided you still fall within the income limits.

You have until tax day, April 17th, to make IRA contributions of up to $5,500 (if under age 50) or $6,500 (if age 50 or older). The important thing to remember is that you can make those contributions for last year, which means you still leave yourself the ability to contribute for 2018 as well. You can invest the $5,500 into one IRA, or spread that amount across multiple IRAs. Your cumulative deposits just cannot exceed the limit. A quick reminder...

  1. Traditional IRA -- Your contributions get the tax deduction now and the funds grow tax-deferred until retirement.
  2. Roth IRA -- No current tax deduction for contributions you make, but the contributions plus earnings grow tax-free forever.

Let me or Gale know if you have any questions.

What's New With Us?

If you received a "welcome" letter or package from TD Ameritrade that references the transition from Scottrade, you can disregard it (see the image below). For some reason, because we were previously at Scottrade, TD must figure that we are apart of the mass transition that they are undertaking to migrate firms over to their platform. This does not apply to us since we migrated nearly a year ago. But, I can see why you might be confused by receiving such a big letter in the mail. Ignore.

In other news, I am excited for the Super Bowl. I don't care who wins. I just hope for a close game, although I think the Patriots will win by two touchdowns. 32-17, New England.

Have a great weekend,

Brian E Betz, CFP®
Principal