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:
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:
- Identify your end financial goal(s).
- 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...
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®