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

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®

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

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

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®

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

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

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®

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

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

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®

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

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®

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

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®

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

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®

The First Company To Reach $1 Trillion In Value Is...

There were so many interesting stories and reports that popped up this past week that I am going to quickly share them all.

Apple hits $1 trillion. Following its quarterly earnings release, Apple became the first company to reach a $1 trillion valuation. This is based on its market capitalization, which is the share price multiplied by the number of shares outstanding. Amazon is the next-largest company, but still sits roughly $100 billion behind Apple, followed by Google ($850 billion) and Microsoft ($830b).

Man rigs McDonalds Monopoly game. An absolutely crazy story about a guy who rigged the McDonalds Monopoly contest back in the 1990s. It is a long article, but if you have 30 minutes it is worth reading. Not soon after this came out, Ben Affleck and Matt Damon announced they will turn it into a movie.

Another solid month for housing. Homes rose by +6.5% on average across the country in May. Seattle maintained its lead on the rest of the country, with prices rising +2.2% during the month and +13.6% in the past year. Las Vegas (up +12.6%) and San Francisco (up +10.9%) held on to the second and third spots. Here is a complete city-by-city look:

What the heck is "blockchain"? Have you been wondering what "blockchain" means and is all about? Here is a good explanation, in basic language.

Capital gains tax change? The Treasury Department is weighing a change to capital gains taxes that would radically alter how investors calculate long-term capital gains. The proposal involves allowing investors to increase their cost-basis by adjusting it for inflation.

Here is roughly how it would work. So let's suppose you invest in something today for $100,000 and sell it in 6 years for $250,000. The capital gain would be:

($250,000 - $100,000) = $150,000 capital gain

Under the proposed change, the "cost-basis" (essentially the purchase price) is adjusted higher for inflation. Let's say inflation is 3% per-year. Your cost basis would increase from $100,000 to roughly $120,000. This reduces your capital gain by $20,000. So, instead of owing taxes on $150,000, you would owe taxes on $130,000.

More bad news for Wells Fargo. Following up on what I wrote a couple weeks ago, more and more details are coming out about the bad business practices that have occurred at Wells in the past decade.

Federal Reserve says "no change". The Fed decided to hold its target lending rate, the Federal Funds Rate, at 1.75% following its most recent committee meeting. It is likely the Fed will raise rates once more before the end of the year, pending stock market behavior.

The Fed Funds rate is the benchmark that banks use to lend more to one another and it is ultimately the rate that trickles down to consumer banks that you and I use when investing into short-term CDs or money market funds.

Unemployment back below 4.0%. The unemployment rate improved to 3.9% in July as +157,000 hires were made during the month. Unemployment remains right near the previous lows from 2000. Take a look...

In The Market...

The S&P 500 gained +0.8% this past week. Let's look under the hood:

(price data via

The S&P index rose for the 5th-straight week, while most sectors finished in the green. Real Estate made a big move, rising more than +3.0%, while Energy was the main loser, down -1.8%. Both of our sector positions performed nicely, with Health Care (XLV) rising another +2.1% and Technology (XLK) rebounding +1.2%.

July gains: The S&P climbed +3.7% in July, marking the 4th-straight monthly gain. Health Care (XLV) was the biggest winner, up +6.6%, while Tech (XLK) gained a little more than +2%. Including the early-August gains, the S&P 500 is still -1.0% below the previous high.

No-cost funds? Fidelity announced it will be rolling out some no-cost index exchange-traded funds (ETFs) in the near future. Fund creators are steadily lowering their fees as there is more and more competition. This move by Fidelity to a zero-fee fund is indicative of that.

ETFs are quickly replacing more traditional mutual funds, due to their reduced costs and greater tax efficiency. Mutual fund providers historically charged anywhere between 1% and 3% to investors for the ability to invest in their funds. Those costs have been driven down as ETF competition has provided largely the same level of performance at a fraction of the cost. Eventually, mutual funds will be very niche and few in number.

For context, we use ETFs that are either very low-cost to own, or, relatively low cost but carry no costs to buy and sell. I am happy to share more if you are interested.

In Our Portfolios...

What's New With Us?

I spent much of the weekend trying to locate and destroy a yellow jacket nest that is forming near the ground next to our house. I have learned more about bees in the past 72 hours than I ever cared to know. If anyone has a tip, I'm all ears. So far I have won a couple battles, but the bees are ultimately winning this war.

Have a great week,

Brian E. Betz, CFP®

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

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

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®

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

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®

The Cost Of Business Just Went Up

The cost of business just went up. Literally.

Long-term interest rates reached a level not seen in over 4 years this past week. The 10-year U.S. Treasury bond yield hit 3.00% for the first time since Dec. 2013. Take a look:

(chart created in

As you can see it has been a long time coming, but something that has seemed inevitable since the start of this year when rates really started to trend higher. You can also see how low rates remain compared to 10 and 20 years ago (or 30 years ago when the 10-year yield exceeded 10%!).

What this means is that the costs to finance have gone up. Mortgages, car loans, student loans, lines-of-credit, etc. are all getting more expensive. This is a big reason why I recommended refinancing debt in 2016 and 2017 because this day would eventually come. Higher rates are not a bad thing -- actually the opposite. But it does mean we are now seeing real inflation take hold.

For years we have heard that inflation is a problem and that interest rates were about to skyrocket. Those have been utter myths. But today they are more of a reality. It is natural for inflation and rates to rise as the economy expands. The key is containing both so that they rise at a steady, sustainable pace. If they rise too quickly that is when we see shocks to various markets, as we did with housing in 2008.

Home prices rise: Speaking of real estate, home prices forged higher in February, rising by an average +0.4% nationwide during the month and +6.5% over the past year. Seattle impressively continues to lead all major cities, up +12.7% annually. Seattle homes also rose the most in February, up +1.7%. Six other cities saw home prices rise by more than +1.0% as well in February alone, including Denver, Detroit, Las Vegas, Los Angeles, San Diego and San Francisco. On a yearly basis, Seattle leads Las Vegas (up +11.6%) and San Francisco (+10.1%).

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

In The Market...

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

(price data via

This past week was pretty dormant considering the biggest companies – Amazon, Google, Facebook, Microsoft – all reported first-quarter earnings results. In fact this time a quarter ago stocks began what resulted in a -10% market decline. The S&P index continues to float between the January record high and the February low.

It was a defensive week, with dividend-paying sectors leading the way (Utilities, REITs) while the more economically sensitive sectors (Materials, Industrials) were the worst performers. Long-term Treasury Bonds gained as well, despite the 10-year Treasury yield hitting 3.0%.

This type of activity is what I would expect to see amid stock market volatility. The overall market outlook did not change much from the previous week. I remain cautious, particularly as we get closer to the summer months, which tend to be bumpy for stocks. We are days from May, which carries the moniker “Sell in May and Go Away” for the tendency by investors to sell stocks and wait until the Fall to start buying again. There is some precedent for this looking back over the years, however last year bucked that trend as the market plowed higher throughout the summer.

We sold our Financials sector position (XLF) across all accounts that owned it. I do not like the movement within Financials over the past two months, which has been relatively weaker compared to some other sectors. To that end I believe there are better sectors to own, namely Energy, which we are looking to buy but will be thoughtful in doing so. We are content sitting on a cash position right now given how choppy the overall market has been. We will be patient and reinvest those funds in the future.

In Our Portfolios...

In Financial Planning...

As Summer nears and the housing market heats up, I know a lot of people who are revisiting the same conversation from a year ago:

Do we sell our house and buy something new, or, do we remodel?

Many of these people are in a better financial situation than they were a year ago, so in a vacuum it may be enticing to buy a more expensive home or to pump money into their current one.

But should it be?

Consider some key differences from a year ago. Unless you are downsizing the next home is only going to be more expensive, so any additional equity you have built up over the past year will be necessary toward the new home. Second, as mentioned, interest rates are higher today. So if you end up with a mortgage balance that is bigger than what you currently have, not only will your monthly payment be bigger but your interest payments will increase. Finally, if you go the remodel route, be aware that contractors are likely more expensive and less available than in recent years. Also, unless you are paying for the remodel with cash, your line-of-credit will come with the same aforementioned financing costs.

It is important to know how the different markets have evolved, especially at a time when housing values are slowly leveling off and financing costs are really starting to rise.

What's New With Us?

As a reminder, I will be out of the office on vacation Monday through Wednesday next week. If you need me I will be available remotely, but may not be quick to respond.

Have a great weekend!

Brian E. Betz, CFP

Zillow Breaks Ground As A Real Estate... Investor?

Zillow is breaking new ground.

The Seattle-based company serving as the largest online real estate database announced it will test its hand at real estate investing. Zillow's goal is to own between 300 and 1,000 homes by year-end in the Phoenix and Las Vegas test markets. Here is how:

  1. Zillow will make immediate offers to home sellers.
  2. Zillow will update/repair the home as needed.
  3. Zillow will work with a prospective buyer's agent to sell the home within 90 days from original purchase.

If you think this sounds a lot like flipping homes, you would be right. It represents a major pivot from Zillow's ad sales-based revenue model. It poses a lot of questions about what it means not just for the future of Zillow, but for real estate agents and real estate in general. CEO Spencer Rascoff justified the decision by repeatedly citing that the company's vast housing analytics supported the move.

Okay... But something seems off about this, or at least missing. Zillow revenues are growing +24%. Why deviate so sharply from the core business model? I appreciate creative thinking and applaud any business that is mindful of skating to where the puck is headed rather than where the puck is at. If this is the case, what are the bigger implications?

Rascoff highlighted two things: Initial feedback from real estate agents has been positive and home sellers want to complete the sale faster than the industry currently allows. I have no idea about the first part. I have not had the chance to chat with any agents about this news. The second part interests me more. In addition to saying that sellers want quicker closings, Rascoff said the following:

"There are people who are basically stuck in their home that would love to go buy another home but can't sell their home. We think that this is another additive to the real estate industry. This could provide the ability to un-stick people from their home."

Is this actually true? He is implying that current homeowners cannot sell their homes because either overall demand is weak or because they cannot pull off a contingency-based purchase (where buying the next home is contingent on selling their existing one). The former cannot be true, because if it were, that would mean the housing market is weakening and logically Zillow would not want to buy into a falling market.

If the latter is true -- that contingency-based deals are cumbersome -- then inserting Zillow into the market will only drive down real estate values. Zillow will be able to offer less than a traditional buyer would because they can offer something no one else can: an instantaneous closing. As a seller, Zillow would be able to still receive top-dollar, but how long will that last before Zillow-the-buyer systemically forces prices lower?

Perhaps that is the brilliance of the idea. Zillow can have their cake and eat it too. They can offer 90 cents on the dollar as the buyer and then tap the traditional sales channel as the seller to obtain the highest price possible. I just see this playing out in Seattle where Zillow buys a property for full-ask (or less) and then turns around and attracts a bidding war when they flip it.

All of this assumes that home sellers care about quick closings as much as Zillow says they do. It also assumes that an average bid from Zillow is competitive enough to entice the seller, rather than some low-ball offer.

An industry shift coming? I heard some feedback discussing that this is merely a step in the direction of where the industry is headed, toward more automated real estate transactions. I don't know enough about the industry or technology to say either way, but I do know one thing... the more complicated the process the harder it is to automate. Real estate transactions are complicated and rarely seamless, so whatever technological shift is happening will likely be a slow one. Then again, maybe this is breaking eggs to make an omelette.

How will it impact agents? Zillow says it will work with agents. For instance, an agent representing a seller could shop the house to Zillow as the interested buyer. Beyond that, I'm unsure exactly how this endeavor benefits agents to the degree that Rascoff implied.

The looming risk: Zillow will take on loans to make these purchases, just like any other buyer, which presents considerable risk if there is a housing market decline. Hence why Zillow is testing it out in a small scale first. The initial investor reaction was negative, as Zillow shares fell -7% Friday off the news.

I am learning more about this as it develops. If you think I've got it wrong I would love to hear your insight.

In The Market...

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

(price data via

The S&P 500 was up +2% this week but it feels like it could have been more than that. The market jumped higher to open Friday before gradually sliding lower throughout the day. But after all it was Friday the 13th...

Despite that, the week was largely positive. Eight of 10 stock sectors were positive. High-yield bonds had the best week since early February. This time a week ago it looked like the bottom might soon fall out if the S&P fell below its 200-day moving average. That did not happen and is sitting roughly 2% above that moving average. Stocks are not out of the woods yet, but there were positive developments for sure.

On that note, we purchased a Technology sector fund (XLK) for most client accounts. Like the rest of the U.S. stock market, Tech has see-sawed since late-January and remains roughly -7% below its previous peak set back in mid-March. This offered what I believe was a nice buying opportunity so we did just that. For those accounts affected it represents an allocation size ranging from 10% to 30% of your total account size.

Additionally, we purchased an Energy sector fund (XLE) for some select accounts. Energy prices broke higher this past week and I suspect that rise to continue, at least in the near-term. I will be looking to add Energy to other accounts as well over the coming weeks if this analysis proves correct. For now though, most accounts are fully invested so it is about opportunity cost.

In Our Portfolios...

In Financial Planning...

Tax day is Tuesday, April 17th! Let me or Gale know if you have any last-minute questions. If you plan to make a Traditional IRA or Roth IRA contribution for 2017 and your bank account is not already linked to your IRA, I advise you make the contribution by check and back-date it prior to April 17. If you date it beyond April 17th it will count toward 2018. There is not enough time to link your bank account and make a 2017 contribution before the Tuesday deadline.

What's New With Us?

Quick story about the value of Amazon Prime Now...

My wife was traveling for work this past week. While she was gone, our daughter ran a temperature so I had to pick her up early from daycare. We had run out of Infant Motrin and, in my haste, thought that I had bought the right one when I made a quick stop at the store. I didn't. Apparently Children's Motrin and Infant Motrin are two different things.

Upon realizing this back at home I knew I was stuck. I was not heading back to the store, with her being sick and all. This is where Amazon Prime Now came to the rescue. Within 2 hours I got the correct Motrin delivered to our door.

Amazon Prime is great, but Prime Now is a game-changer. Even though Prime Now is available in more than 30 major U.S. cities, it is far from mainstream adoption. Of course if Amazon starts delivering pharmaceutical prescriptions in the coming year that will change fast...

On a completely different note, I am going to my first Mariners game of the year tonight. It should be fun!

Have a great weekend,

Brian E. Betz, CFP®

Four Things That Could Hurt The Housing Market

I found myself talking real estate a lot the past few days. With the Spring season heating up for the housing market, the inevitable question becomes:

"Will 2018 be just as hot as last year?"

The latest housing data gives a peak into how home values are trending entering Spring/Summer. Housing logged another strong, yet steady month in January. Prices rose by an average of +0.3% across the 20 major markets. Seattle homes gained +0.7% monthly and are up +12.9% over the past year. Seattle maintains its top spot nationwide, but cities like Las Vegas and San Francisco (up +11% and +10% year-over-year, respectively) have chipped away at that lead.

Here is the full city-by-city look:

This should be an interesting year for real estate. Housing demand remains red-hot, especially among first-time home buyers. I was speaking with friend/Realtor Ryan Halset, who said that competition for homes listed in the $500,000 to $700,000 range are going for more than +$100,000 above listing. That range is so significant because it is roughly where most first-time home buyers fall (at least in Seattle).

Overbidding, waived inspections and guaranteed appraisals remain the norm, but there are four factors I believe could slow housing prices following what I sense will be a Spring boom:

  1. Stock market volatility -- Stocks have not been this choppy since early 2016. Back then stock market losses did not prevent home-seekers from buying. It might not again this time around either, but if market volatility drags on or worsens, it could cause buyers to pause.
  2. Rising interest rates -- Interest rates are much higher today than they were two years ago. Back in early 2016 long-term rates were still falling, as the 10-year Treasury yield was below 2.0%. Today the 10-year yield is creeping up toward 3.0%, which means pricier financing. This may not deter first-time home buyers but should make real estate investors less willing to use debt to leverage property purchases. That would mean reduced overall housing demand, which means flattening or lower prices.
  3. More home seekers left in the dust -- I have no data to back this up, but I have a theory based on conversations I have and comments I overhear. There are a lot of home seekers who say they are waiting for prices to cool off before buying. As risky as that is, it might work IF they are investing the capital they would otherwise use to buy a home. My sense is they are not. So while home prices plow higher their cash is sitting idle in the bank and actually losing value when you account for such housing inflation. If that capital is not keeping pace with inflation, their home buying options narrow.
  4. If the economic cycle turns -- I am not saying the economy will turn this year, but it could. Looping back to #1, if stock prices were to fall that would cause employers to cut their workforce. That would immediately stunt the housing market because those without jobs are not going to buy homes. I do not think this will occur, but cyclically speaking we are inching closer to the point where I would expect unemployment to rise.

I say all this living in the bubble that is Seattle, realizing that housing prices are not surging anywhere else like they are here (sans maybe San Francisco). Nonetheless, it is all relative, as cited in #4 above.

In The Market...

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

(price data via

Every stock sector was positive, rebounding from consecutive weekly losses. Volatility has really ramped-up though, so give it one more day and the above picture could have looked a lot different. This past week was shortened as the market was closed in observance of Good Friday. I suspect that the market will continue to be choppy and that any rallies could be short-lived.

It was nice to see the bond market rally and record its best week of the year. Long-term interest rates fell, with the 10-year Treasury yield dropping from 2.83% to 2.74%. When the 10-year Treasury rate rose near 3.00% a few weeks ago I said then that I thought interest rates would fall before eventually moving higher. That is precisely what has happened. I think they will fall a bit further before subsequently surging higher and seeing the 10-year yield cross 3.00%. Take a look at the 10-year Treasury bond rate here:

(chart created via

A wild quarter comes to a close: Remember that stellar January we saw to start the year? Seems like a distant memory. The S&P 500 snapped its 9-month quarterly winning streak, falling -0.9% in the first quarter. March was the second-straight monthly decline, down -2.5%. Stocks fell in back-to-back months for the first time since Dec. 2015/Jan. 2016.

Moving into the second quarter my message remains the same as last week and the week before. Expect more choppiness. The market needs to hold above a couple key levels and eventually get back to new highs before a meaningful rally will resume.

In Our Portfolios...

In Financial Planning...

As you complete your taxes for 2017, start looking ahead to 2018 and some of the major changes that influence your financial decisions. Your 2018 tax return might not look the same as recent years. Here are some of the notable changes that might affect you a year from now:

  • The standard tax deduction amount will double. This means fewer people will itemize their taxes because the standard deduction ($12,000 if single, $24,000 if married) could exceed the sum of all eligible itemized expenses, such as mortgage interest paid.
  • Only $750,000 of mortgage debt is deductible. This is down from the previous $1 million limit. Any interest paid on up to $750,000 in mortgage debt tied to a primary or secondary residence can be deducted. Any interest paid on debt above that threshold cannot. On the plus side, any pre-existing mortgage debt will not be affected. Only new mortgage debt taken on after April 1st 2018 is subject to the reduced limit.
  • Property tax deductions will be capped at $10,000. Previously, there was no limit on the amount of property tax or state/local income tax deductions you could claim. If you own a nice home or live in a state with high income taxes (cough cough, California...) this will adversely impact you.
  • Charitable donations can be deducted, up to 60% of your adjusted gross income (AGI). This is up from the previous 50% limit. In light of the increased standard deduction though, fewer people will itemize their deductions. This means charities will actually suffer because taxpayers who claim the standard deduction will have less incentive to donate.
  • Unreimbursed medical expenses exceeding 7.5% of AGI can be deducted. This is down from the previous 10% threshold. Let's say your AGI is $100,000 and you have $10,000 in medical expenses. You could deduct the amount that exceeds $7,500 (derived by multiplying $100,000 of AGI x 7.5% threshold). This means $2,500 of your $10,000 medical expenses are deductible. Under the previous 10% cap, none of these expenses would have qualified. (Note: This is for tax years 2017 and 2018 only and is set to go back to 10% in 2019.)

What's New With Us?

We are hosting family this weekend for our daughter's first birthday, which happens to coincide with Easter this year. While celebrating for her I will be watching the Final Four.

Have a happy Easter weekend!


Brian E Betz, CFP®

Do Pregnancy Rates Predict Stock Market Returns?

Before I dive into this week's blog post, I want to let you all know that we are actively looking to hire an Executive Administrative Assistant. The full job posting is available on our site here. If you know someone who might be interested, let me know. They can reach out to me directly with their resume as well. Now on to this week's market thoughts...

Do pregnancy rates predict future economic recessions?

According to the National Bureau of Economic Research (NBER) they sure might. Their study tracked 109 million births that occurred from 1989-2016 and found that the number of conceptions declined ahead of eventual declines in economic growth (GDP) back in the late-80s, then again ahead of the tech bubble in the late-90s and then once more ahead of the subprime mortgage crisis in 2007.

This chart shows the positive correlation between conceptions (solid line) and economic production (dashed line):

(per the National Bureau of Economic Research, via CNBC)

I can get on board with this. When we are financially optimistic we tend to spend more. When we are pessimistic or uncertain we tend to spend less. Kids are expensive, so it is reasonable to assume that couples might think twice about having one or more kids if they are concerned about things like job security, stock market conditions or the U.S. economy in general. There are very few areas that are truly recession-proof and two of them happen to be child care and college tuition. If birth rates decline it is very possible that it is because families consider those costs, at least to some extent.

This hopefully goes without saying but this report should not influence investment decisions, at least not in a vacuum. It is a human interest story more than anything. But it is a pretty plain way of thinking about how we feel about the market and economy.

Corporate earnings boom: It was a solid quarter for large publicly traded companies. Revenue growth was terrific and the overwhelming majority of companies surpassed earnings expectations. Here are a few of the highlights (per FactSet):

  • Earnings grew nearly +15% in Q4, which was the most for any quarter since 2011.
  • All 11 stock sectors experienced profit growth. So unlike prior quarters, positive earnings results were not limited to a handful of sectors.
  • Sales increased +8.2%, which was also a high dating back to 2011.
  • Compared to estimates, 77% of all S&P 500 companies beat their sales targets. This is the highest percentage since FactSet started tracking data in 2008.

Because we emphasize sales over profits, here is a sector-by-sector look at revenue growth in Q4:

(source: FactSet)

Housing prices inch higher: Home values appreciated by an average +0.2% in December nationwide (per the S&P/Case-Shiller report). Seattle real estate beat that average, rising +0.6% during the month, and continue to lead all major cities on an annual basis as Seattle homes have risen +12.7% in value over the past year. Las Vegas continued to narrow that gap, up +11.1% annually, followed by San Francisco (up +9.2%).

Here is a complete city-by-city look at housing price changes:

In The Market...

The S&P 500 rose +3.6% last week. Let's look under the hood:

(price data via

Last week's surge came on the heels of the S&P falling -2% the week prior, so some context is needed. Nonetheless, following a week where all 10 stock sectors were negative it was good to see all 10 sectors rally back. As a whole the S&P 500 index still remains 3% below its previous peak set back on Jan. 26th. In my view that peak needs to be surpassed soon in order to sustain this rally in the weeks ahead. Or I sense market conditions will remain choppy.

If this rally is to sustain across all/most sectors of the market, I still think Technology will lead the way. Tech continues to look the healthiest among all areas of the market, on all timeframes we analyze. This past week it was Tech and the other growth-oriented sectors that performed the best, namely Financials and Industrials.

We continue to own Financials as well as a tech-heavy index fund (SPYG) across most accounts. I have been looking to add the Tech sector fund (XLK) for a couple weeks but am still weighing whether to cut bait on our Utilities position or wait for a potential rebound in the Utilities sector. This is getting in the weeds a bit, but I am happy to share more if you're interested in my thought process.

Since I didn't send out a blog last week I didn't get to mention that the U.S. market snapped its 15-month winning streak, as the S&P 500 fell -3.9% in February. So far March is starting out much better than did February.

In Our Portfolios...

What's New With Us?

I will be sending you our updated Form ADV 2A, which is disclosure information pertaining to our firm. This is a form you received when you first became a client and is something we update at least annually. If you have any questions about its contents, please ask. However, no action is required of you. It is purely for your information.

I am hoping the sunshine lasts through the weekend so that I can mow our yard for the first time this year. I will also finish getting settled in to our new office at 2nd Avenue and Columbia St. If you happen to be in downtown Seattle please stop by and say hi!

Have a great weekend,

Brian E Betz, CFP®

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

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®

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

In The News...

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

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

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

Here is a complete city-by-city breakdown:

In The Market...

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

(price data via

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

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

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

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

In Our Opinion...

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

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

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

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

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

Will history repeat itself? Tough to say.

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

In Our Portfolios...

Q&A/Financial Planning...

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

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

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

What's New With Us?

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

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

How WE help combat fraud:

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

How YOU can help combat fraud:

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

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

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


Brian E Betz, CFP®

'Tis The Season For A Stock Market Surge

In The News...

Eleven months down. One to go. We are officially in the home stretch and the stock market is red-hot.

Seasonal warmth: I have repeatedly said how the 4th quarter (Oct thru Dec) is historically the strongest market period of the year. That seasonal strength was slow to develop but has really taken off in recent weeks. The S&P 500 gained +3.2% in November (including dividends) and is up +20% year-to-date. December is historically the best-performing month of them all, which bodes well for market momentum finishing out 2017. More on this below.

Housing cracks? Home prices grew +0.4% nationwide in September, showing steady growth similar to prior months. The big news is that home values actually declined in Seattle (down -0.3%) for the first time in nearly 3 years (Jan. 2015). Only two other major markets, Detroit and Washington D.C., saw prices fall in September. Despite the monthly drop, Seattle real estate continues to lead the nation year-over-year, up nearly +13% in the past 12 months. Las Vegas ranks second over that same time (+9.0%), followed by San Diego (+8.2%).

I am not surprised that housing prices flattened a bit here locally. While I don't foresee prices sustaining double-digit percentage growth, I don't see prices falling, either. I would expect that housing prices continue to rise but at a slower, more moderate pace than we're used to in Seattle and across the West Coast at-large.

Here is a detailed look at the latest S&P/Case-Shiller housing numbers:

In The Market...

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

(price data via

When you look at the broad stock market through the lens of the S&P 500, you would really have to go back to the mid-90's to find a market period this strong. Consider this... the S&P just completed its 13th-straight monthly gain. That literally has not happened since 1995. The size of this bull market, as measured by the total gains, are not bigger than more recent winning streaks but the rise has been more consistent, as evidenced through the 13 consecutive monthly gains.

The S&P 500 index blew through 2,600 and appeared on its way to an even bigger week than the +1.6% gain suggests. But pretty soon after the Michael Flynn news broke on Friday stocks got choppy in a hurry and ended the week with a whimper. Financials led the way, which were likely buoyed by the prospects of the GOP tax plan passing through Congress. Technology and Real Estate were the lone losers.

Bonds were down, despite a big Treasury bond rally on Friday. High-yield bonds showed some cracks, which I am intently watching for a couple reasons. First, high-yield bonds have taken a tumble around this same time each of the past two years. Second, when high-yield bonds fall they usually pull stocks down with them in the days ahead. We'll see if either or both of those things happen into mid-December. Market momentum today is stronger than it was at this same time in 2015 or 2016, so that is a plus.

In Our Opinion...

Every month that the market moves higher investors become more willing to invest. I know this because I hear about it, both from you as clients and others who are not. This is a normal reaction and in some ways makes sense -- if the market is trending higher we should be willing to invest more, or at least refrain from selling the investments we own. This occurs because if the market is rising we want to make more money. We expect it.

But what exactly do we expect?

This is essential when talking about investment returns. Expectations should stem from having a coherent plan. We recommend using these two steps to work backward:

  1. Identify your end financial goal(s).
  2. Calculate how much you need to invest each year, and subsequently how much you need to earn each year, to achieve that goal.

This is obviously over-simplified, but the point is, once you know what you need to earn the year-to-year performance of the "stock market" becomes less important. I mention this because the S&P 500, which I use to broadly define the market, is currently up +20% for the year. So long as you are close to earning what you need for the year, that is much more important than whether you are keeping pace with the S&P 500.

If your plan specifies a need to earn +10% per-year and you are currently up +11% year-to-date, you are right on track. But if you need to earn +10% and are only up +3% year-to-date, different story. Do not get frustrated if you feel like you should be earning more if you don't know how much you need to earn to begin with.

Arbitrarily feeling like you should make more can encourage bad behavior. It often compels us to take investment risks we otherwise would not take, which can turn out disastrous. It convinces us to be more aggressive than what our true risk appetite can stomach. Over the long run it is more likely that the market will settle down and only rise by +10% in 2018 than encore with another +20% return in 2018.

The opposite holds true too. Suppose the market were down -20% for the year right now rather than being up that amount. This can compel us to turn more conservative than we should be, which is equally as damaging. Part of being able to participate in stock market gains is understanding the potential for loss. Yet when losses happen, we become prisoners-of-the-moment and quickly forget that:

a) The stock market has consistently risen in the long run.
b) We can actually stomach greater short-term loss than we think, because we have properly planned.

As long as you understand what you need to earn on the upside each year and what percent you can afford to lose in the event of a down year, whatever happens in "the market" is mostly noise. As an investment management firm we strive to achieve the gains you need while limiting losses. Generating gains has particularly been the focal point this year given the overall market's ascent. We always keep one eye on loss-prevention too, so we can respond well should the market take a negative turn.

In Our Portfolios...

Q&A/Financial Planning...

There are a few tax planning related things I want to discuss, but since they stem from the proposed GOP tax plan that has not fully passed, I will hold that commentary for now.

Instead I want to share my latest blog post that is available on our general blog page: Why So Emotional? Avoid These 5 Irrational Thoughts About Investing. I briefly wrote about the topic of emotional investing a few weeks back and thought it was worthwhile to flush out a more complete blog post. I hope you like it.

What's New With Us?

From time to time you will receive emails from TD Ameritrade regarding such things as trade confirmations or fund prospectuses. A few of you have asked if you can turn off these email notifications. Unfortunately, we cannot. The only way to do so is by electing physical mailing of account statements, which you do not want because of the service charge assessed for mailing documents (as companies go green). If you have any questions about the emails you receive please ask, but you should be able to ignore/delete most of them.

Have a great weekend,


Brian E Betz, CFP®

GOP Unveils Its Tax Plan. Could It Lead To A Housing Recession?

In The News...

Republican Congressional leaders released details of their tax plan. Here are the major reforms:

  • Income taxes: The number of tax brackets would fall from the current seven to four: 12% (assessed on taxable income between $24,000 and $90,000 for married couples), 25% (on income from $90,000 to $260,000), 35% (on income from $260,000 to $1 million) and 39.6% (income above $1 million). The most notable change is that the 25% bracket would cover income up to $260,000 for married couples. Today, income that exceeds $153,000 is taxed at 28% and income exceeding $233,000 is taxed at 33%. 
  • 401(k) contributions: No changes to contribution limits or deductions.
  • Small business taxes: A portion of pass-through income from business profits would be taxed at 25% rather than the owner's likely higher personal tax rate.
  • Mortgage interest deductions: Today you can deduct interest on up to two home mortgages, not exceeding $1 million in mortgage debt. The $1 million limit would be cut in half, meaning you could only deduct interest tied to a maximum of $500,000 in mortgage debt.
  • Standard tax deduction: This would double to $12,000 for individual tax filers and $24,000 for marries couples.
  • Personal exemptions: Would be eliminated. Today, you get to deduct $4,000 apiece for you, your spouse and any dependents in your household. So, a family of four would go from $16,000 in exemptions to $0.
  • Alternative Minimum Tax (AMT): Would be eliminated.

There are more changes, but these are the major ones. For my personal thoughts on this initial GOP tax plan, scroll to the OPINION section below.

New Fed Sheriff In Town: Four years after taking the reigns of the U.S. Federal Reserve, Chairwoman Janet Yellen is being replaced. President Trump's nominee, Jerome Powell, will take over the Fed in Feb. 2018 when Yellen's term expires. Yellen has held the position since 2014. She took over the post from former Chair Ben Bernanke (2006-2014), who in turn took it over from Alan Greenspan (1987-2006).

What does this regime change mean to future monetary policy? Probably not much. From what I have read Powell was a supporter of Yellen and the two were largely in lockstep with regards to the timing of interest rate hikes. I highlight that because among those who have bashed the Fed, the biggest backlash has been how long it took the Fed to begin raising interest rates. While the change in leadership initially seems like no news, remember that this is Trump's appointee. Trump had promised major shake-ups to monetary policy and it appears that will not be the case. In my view that is wise. I am also not surprised at the pivot, either.

Latest on real estate: Housing prices gained +0.5% in August, per the latest S&P/Case-Shiller report. The tide might be turning a bit, as Seattle homes appreciated just +0.2% for the month and Portland homes were up +0.1%. San Francisco was the only of the 20 major cities tracked that saw prices decline, slipping -0.1%.

Annually speaking, homes have appreciated nationwide by an average of +6.1%. Seattle real estate has gained +13.2%, while Las Vegas ranks second with prices rising +8.6%. Here is a complete city-by-city look:

I would expect housing prices broadly to settle in to the +4% to 5% annual growth range in the coming year. That is more representative of a smooth housing market. I would expect prices in/around Seattle to slow a bit as well, meaning prices that rise at a slower pace than the currently torrid +13% growth. Seattle homes should remain near the top compared to the other major cities, given the ongoing tech migration and recent success of Amazon, Boeing and Microsoft.

In The Market...

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

(price data via

Ten months down, two to go. So far 4th quarter seasonal strength I have preached has been as advertised. The S&P index rose +2.3% in October. Staring down the barrel of November and December, here is a recent historical look at how the S&P 500 has performed in these two months, cumulatively (including dividends):

2016: +5.9%
2015: -1.4%
2014: +2.4%
2013: +5.6%
2012: +1.8%
2011: +0.7%
2010: +6.7%
2009: +8.1%
2008: -6.6%

As you see, broad market performance has been positive nearly every year in these two months over the past decade. Coming off a somewhat mixed week, with four of the 10 sectors being in the red, I still believe market conditions look strong moving forward. Next week I will dig into earnings season results, which will begin to wind down.

In Our Opinion...

Among the proposed tax reforms, the most significant may be the slashed mortgage interest deduction. You can currently write-off interest tied to $1 million in mortgage debt. Under this tax proposal that $1 million limit falls to $500,000, meaning a reduced tax deduction if your mortgage exceeds $500,000. Here is what Jerry Howard, CEO of the National Association of Home Builders, had to say about it on CNBC:

"There are seven million homes on the market right now that are more than $500,000. Those houses are automatically going to be devalued." -- Jerry Howard, National Association of Home Builders

Howard went on to say that this would lead to a housing recession, as such depreciation would become contagious and spread across real estate markets. This is a bombshell quote considering the source.

Rather than use $500,000, a more appropriate number to cite would be $625,000. At that purchase price, assuming the home buyer puts the standard 20% down toward the home, the resulting mortgage would be exactly $500,000. If your mortgage balance today is less than this, you are unaffected. If it is more, your tax deduction falls.

But is it that straightforward? Maybe not. First, remember that deducting mortgage interest is part of itemizing your tax deductions, rather than taking the standard deduction. Under this tax plan the standard deduction would double from $6,000 to $12,000 for individuals and $12,000 to $24,000 for married couples. On its surface it appears this would compel more people to take the standard deduction and fewer people to itemize. Let's just see...

Let's assume that your average mortgage balance during the year is $500,000 and the interest rate on that mortgage is 4.50%. That means you would have paid the following in mortgage interest throughout the year: $500,000 x 4.50% = $22,500 in mortgage interest paid.

Is it a coincidence that this is very close to the $24,000 standard deduction for married couples? Probably not. So, in a vacuum, if the only itemized deduction you had was interest tied to a $500,000 mortgage, you would be very close to the break-even point between itemizing vs. taking the standard deduction.

Back to Howard's quote... I disagree that this change would lead to a housing recession, for two reasons. First, if we are talking about residential homeowners, their list of reasons for buying a home likely does not include whether they can deduct all of the resulting mortgage interest. If their list of reasons does include such math, it is probably toward the bottom of their priorities. Existing homeowners will still upgrade into a bigger/nicer home if their life needs it and their finances allow it. First-time home buyers are new to the game and won't know any different.

Second, real estate investors (the other type of buyer) are unique. I would suspect many of them purchase with cash, meaning little-or-no financing. I would further assume real estate investors are already deducting the interest tied to the mortgages on their primary residence, if they have a mortgage at all. If they purchase additional real estate with the help of a mortgage they cannot deduct that mortgage interest today anyway, so reducing the debt limit from $1 million to $500,000 is irrelevant to them.

It is hard to give too much opinion on the overall tax plan because the details are fresh and there seems to be a number of potential tax offsets. I do favor a simpler tax code and like seeing fewer income tax brackets (I have actually long-favored a flat tax). I would be interested to know your thoughts -- feel free to email me with them.

In Our Portfolios...

Q&A/Financial Planning...

Do you know your 401(k) vesting schedule?

Mostly likely not. If you just started a new job or are unsure how long you will stay at your current one, make sure you know the vesting requirements on these employee benefits:

  1. Employer contributions made into your 401k account
  2. Restricted stock (RSUs)
  3. Stock options

"Vesting" means how long you have to wait until you have earned the dollars or shares granted to you. When it comes to restricted stock or stock options awarded to you, the vesting is usually stated pretty clearly on a statement. When it comes to employer 401k contributions, namely the matching provisions, you usually have to dig into the 401k plan summary to know the vesting schedule.

For example, I recently reviewed the new 401k plan for a client who changed jobs earlier this year. He earns a 25% employer match on up to 6% of his pay. So, if he contributes the full 6% that is eligible for the match, his employer effectively contributes 1.5% of his salary into his 401k. Those employer dollars vest in four increments: 25% after 1 year of service, 25% after 2 years, 25% after 3 years and the remaining 25% after 4 years.

This is key because he is not sure if he will be with the company for four years (as most people aren't given how frequently workers change jobs these days). There is value in pointing out what money he would be at risk of losing should he leave at any time within the first four years of employment.

It is common for the quality of the employer match to persuade or dissuade people from participating in the 401k at all. That is for another conversation, but the point here is that if you are spending time evaluating the employer match you better look at the vesting schedule while you are at it.

What's New With Us?

As I mentioned a few weeks ago, I am going to start creating some short, YouTube-like videos that address different aspects of our firm. The first one will be on our investment philosophy and how it compares to traditional long-term investment theory. I'll be eager to get some feedback.

Last weekend it was 70 degrees here in Seattle. Today it is snowing. Go figure...

Have a great weekend,

Betz Signature 250px.png

Brian E Betz, CFP®