'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 stockcharts.com)

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,

Signature.png
 

Brian E Betz, CFP®
Principal

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

In The News...

Are major tax changes coming?

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

CURRENT tax structure:

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

TRUMP tax structure:

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

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

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

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

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

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

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

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

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

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

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

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

In The Market...

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

(price data via Stockcharts.com)

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

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

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

(chart created via Stockcharts.com)

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

In Our Opinion...

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

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

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

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

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

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

In Our Portfolios...

Q&A/Financial Planning...

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

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

What's New With Us?

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

Have a great weekend,

Betz Signature 250px.png
 

Brian E Betz, CFP®
Principal

Real Estate Remains The Hot Topic Heading Into August

In The News...

Another month of solid housing numbers...

Home prices rose by an average +1.0% in May, per the latest S&P/Case-Shiller index. Year-over-year, prices have gained +5.6%. Here are the 5 cities boasting the greatest annual price appreciation:

  1. Seattle (+13.3%)
  2. Portland (+8.9%)
  3. Denver (+7.9%)
  4. Dalllas (+7.8%)
  5. Detroit (+7.6%)

Here is a detailed, city-by-city look:

Seattle real estate not only led the nation again, but extended its lead. I won't rehash my previous thoughts on Seattle housing, but instead want to share some interesting facts from this latest report:

  • Since housing bottomed in Feb. 2012, San Francisco has seen the largest, cumulative rise in home prices.
  • The average U.S. city population has risen +4.6% since 2010.
  • Seattle population growth has more than tripled the national average in that same time, up +15.7%.
  • Portland and San Francisco populations rank #2 and #3 in growth, up +9.6% and +8.2%, respectively.
  • 64% of homes are occupied by their owners (rather than, say, rented out). San Francisco (36%), Seattle (46%) and Portland (52%) are well under that, reflecting higher levels of real estate investment in these areas.

In The Market...

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

(price data via Yahoo Finance)

Stocks: Financials and Utilities were the runaway winners this week, as returns were pretty split at the sector level. Energy was the biggest loser (down -1.2%), yet I actually like the outlook for Energy to rebound in the weeks ahead. Energy is down more than -11% year-to-date, but that may turn around soon.

Last week we purchased a Financials sector fund (XLF) for many client accounts. As mentioned, Financials were the top-performing sector this past week. More importantly though, the long-term view looks positive for Financial companies. This daily price chart shows why:

(chart created via stockcharts.com)

Price looks poised to move higher now that it has crossed above previous record highs. Also, Relative Strength (the chart above the main chart) is nicely above 60.0 and rising. Relative Strength, or "RSI", is a measure of price momentum. It measures the size of up-days versus the size of down-days for any investment in question. If the positive days are simply larger -- as has been the case with Financials -- the RSI number rises.

The concept of RSI might seem like common sense -- if price goes up so too does RSI, and visa-versa. But, what it really tells us is whether the price of an investment has risen or fallen too quickly. If that occurs it often means the price will reverse direction. We certainly don't want to be on the wrong end of that by buying an investment that has risen too quickly and is due to fall (a RSI reading above 70.0 is considered "overbought" and could fall).

Ultimately, RSI is central to our analysis because it helps validate price movements by helping us determine if a) there is a trend, and b) if the current trend will continue or change.

Bonds: A fairly good week for bonds, as Treasuries were up +1%. Both high-yields and investment-grade bonds were essentially flat.

In Our Opinion...

A quick public service announcement regarding the latest jobs numbers...

The unemployment rate fell to 4.3% in July. You will hear a lot about how that is a 16-year low, which is true if we ignore the fact that it was 4.3% just two months ago. I wrote about the implications of current employment levels back then, which you can read here.

The important thing to remember is that unemployment is a lagging indicator. I cannot stress that enough. The last two times unemployment fell into the low-4% range (1999, 2007) the market precipitously fell within 1 year or so. But even as I say that, 1 year or so, notice how vague that sounds.

  1. One year is a broad timeframe, much too long to fit within our investment decision-making process. Because...
  2. It could take longer than 1 year for a big market decline to materialize. We aren't going to sit on our hands waiting for something to occur. Also...
  3. Just because the markets receded when unemployment hit similar levels in the past does not guarantee it will happen again.

In Our Portfolios...

(Note: Each client's account is uniquely managed, based on account size and risk tolerance. Your account will only own some, not all, of the investments bought and sold over time.)

Q&A/Financial Planning...

Is Amazon coming for financial advisers?

I read an article in InvestmentNews about the prospect that Amazon might consider dipping its toes into the financial advisory world. I have considered this for some time now, as one mantra I believe is that technology is coming for your job, if it hasn't already.

The first generation of do-it-yourself technologies, dubbed "robo advisers", already exists. Robo advisers appeal to a certain market, typically investors under-30 who want the lowest-cost investment platform possible. I have partially written and scrapped many blog drafts on this topic because, while I have spent a lot of time researching robos, I have not done enough due diligence to fully judge.

Here is what I would say about robo advisers:

  • Like other do-it-yourself financial technologies, such as Turbo Tax or Rocket Mortgage, robos are rife with flaws (which I'm happy to share).
  • Over time though, they will improve like other first-generation technologies.
  • Robos serve a different purpose and type of client than we do. Are we more expensive? Yup, we are. But we also provide exponentially more value than they do, too.
  • The funny thing about the article is that it highlighted the threat Amazon could pose to financial advisers like us if Amazon chooses to venture into this space. Amazon actually poses much greater threat to current robo advisers than they do to firms like ours. At least for the next 20 years or so... 

What's New With Us?

Our trademark was approved to register/protect our company name, "Percension", with the U.S. Patent & Trademark Office! I want to thank my friend/attorney, Garrett Parks, of Polsinelli LLP for helping execute this effort for us over the past year. It feels good to safeguard our company name as it develops into a true brand over time.

Have a great weekend,

 

Brian E Betz, CFP®
Principal

A New Richest Person In The World And A New Law In Seattle

In The News...

There was a new sheriff in town, for a moment.

His name: Jeff Bezos.

Bezos, the CEO of Amazon, had supplanted Bill Gates as the world's richest person following Amazon's earnings release. Amazon's share price rose and Bezos' net worth climbed to $92 billion, narrowly edging the Microsoft founder.

But... by the end of the week, the stock price fell back and Bezos is again #2 in the world.

It is only a matter of time though. Perhaps more impressive than Bezos' meteoric rise is the fact that Gates has been the world's richest man in 18 of the past 23 years (per CNBC). Not only that, but the fact that the two-richest people in the world reside in Seattle (within blocks of each other) is mind-boggling.

Drop that device! Washington State passed a new law that went into effect last week, barring mobile device use while driving. The biggest change, which bolsters the existing law preventing drivers from texting or holding a phone to their ear, is that you cannot even hold your electronic device while driving. On top of that, you cannot eat or do your makeup while driving, either.

The law obviously aims to reduce injuries stemming from collisions. I approve it. Traffic has become horrendous in Seattle as the population has exploded in the absence of additional roads/infrastructure. The traffic is bad enough, but it worsens when people pull out their phones the second they hit a red light or bumper-to-bumper traffic. This legislation will hopefully curb what has been a self-perpetuating problem. Even if traffic does not dramatically improve, it should reduce the number of crashes and injuries.

In The Market...

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

(price data via Yahoo Finance)

Stocks: Role-reversal occurred last week, as previously weak sectors such as Energy and Consumer Staples led and stronger sectors (Health Care, Tech) declined. The last two times we saw the S&P 500 stall on a weekly basis like this (In June and March) the following few weeks were flat-to-down, before again chugging higher. We'll see if history repeats itself here, entering what is seasonally the worst month of the year for stocks.

Below in the Portfolios section you will notice that we bought Financials (XLF) and sold Real Estate (VNQ). This might seem funny considering my comments last week about patience. Sometimes things happen quick and conviction rises. That was the case here. Simply put, I believe Financials have a better technical outlook, led by the fact that Financials are knocking on the door of all-time-highs.

Bonds: A down week for conservative bonds (TLT, LQD), but not terribly unexpected given the yo-yo behavior the past few weeks. High-yield bonds were positive on the week, which bodes well for stocks, I believe.

In Our Opinion...

On Wednesday the Federal Reserve opted to leave short-term interest rates unchanged, keeping the federal funds rate at 1.00%. It was the 5th time the Fed has met this year. It would have been the 3rd rate increase this year, had that decision been made.

I always say to ignore the noise around the Fed. The below image typifies why. A lot of investors have grown so obsessed with finding clues within Fed statements and meeting minutes/notes that there are now side-by-side comparisons of current vs. previous Fed statements. Not just general comparisons of tone or major economic issues, but comparing Fed statements word-for-word. Take a look...

(source: Michael Sheetz, CNBC.com

The infatuation with the Fed baffles me. It has cooled a bit since the Fed began raising rates in late-2015, but nonetheless, the 24-hour news cycle and continuing narrative that the Fed dictates market returns attracts clicks.

My advice remains the same: Know what is going on but do not let speculation over the direction of short-term interest rates guide your investment decisions.

In Our Portfolios...

(Note: Each client's account is uniquely managed, based on account size and risk tolerance. Your account will only own some, not all, of the investments bought and sold over time.)

Q&A/Financial Planning...

I was asked to present to a group of new parents (myself included) this past week, on topics most relevant to financial planning for kids. After soliciting feedback on topics they were most interested in, my talk centered on 3 main areas:

  1. College savings
  2. Life insurance
  3. Estate planning

I realize most of you are not new parents, but many of the concepts within these categories may still apply. In no particular order, here were some takeaways I thought worth sharing...

  • Are you helping save toward your grandchild's college savings? If you use a 529 plan (the most popular option) make sure you understand how your eventual account withdrawals will impact, and potentially hurt, your grandchild's financial aid eligibility.
  • If you are already saving for college, have you run the math to know that you are saving the right amount to afford the type of school and number of years you want to accommodate? Most do not, which often starts with ignoring the fact that college costs increase 4-5% per-year.
  • Are you nearing retirement and in need of life insurance? Check to see what coverage you currently have with your employer, or what coverage you can obtain prior to leaving. It will likely be much more expensive to obtain a new life insurance policy in your 60s than it would to continue your existing policy held through work ("portability" feature).
  • If you own a permanent life insurance policy, does it still meet your needs? Do you need less coverage? More? How much cash value is there within the policy?
  • If you have a Last Will And Testament in place, how recently have you reviewed it? For example, if family dynamics have changed and you would prefer a different Executor to carry out your wishes post-death, you should update it.
  • Do you own a Living Trust? Among other things, a trust helps certain assets seamlessly pass to the intended heir, bypassing what can be a lengthy probate process. It also helps keep your personal/financial matters more private. A trust layers on top of your Will.
  • Are estate taxes a concern? The federal limit allows a married couple to pass roughly $10 million tax-free to their heirs, but you may still owe state estate taxes. Right now the WA State exemption is $2.1 million, a much lower threshold than the federal exemption.

What's New With Us?

There are a number of exciting things I have in the works. Sorry for being vague about it, but once I have more detail I will share it.

Have a great weekend!

 

Brian E Betz, CFP®
Principal

Seattle Real Estate Sizzles Heading Into Summer

In The News...

In light of the 4th of July holiday I opted not to send out a recap last week. So I'll play a bit of catch-up and touch on some things that occurred over the past two weeks.

Housing Prices Hum Along: The housing data has become redundant the past few months. I say that in a good way, particularly for us in the Northwest. Homes appreciated by an average of +5.5% in April, which reflects the trailing 1-year gain. Seattle widened its gap over the rest of the country, rising +12.9% annually. This growth more than doubles the national average and is nearly +4.0% better than the next-closest city (Portland).

Here is a city-by-city look at both monthly and annual price changes:

There is not much to add that I have not said before. Yearly growth of +5% is stable. It does not reflect the bubble that so many continue to preach. Whether Seattle-area homes are overpriced is a different discussion, though I believe this market to be strong.

Different markets will have their time in the sun as the ebbs and flows of hiring occur, as Seattle does now and as San Francisco did in recent years. I suspect growth to remain strong along the west coast, which includes when it eventually comes down from double-digits into the 5% (or so) range. If I had to say I'd think we are a year away from that. But do not mistake slowed growth for falling home values. They are nowhere near the same.

In The Market...

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

(price data via Yahoo Finance)

Stocks: The first half of 2017 came to an end with a whimper. The S&P 500 did gain nearly +3.0% in Q2 but absorbed a bit of a sell-off at the end of June. Through the first half of 2017 the S&P was up +9.0%, tracking nicely above its long-term historical average for a six-month period.

On a sector basis, Technology and Health Care have been the best performers year-to-date. Only the Energy is negative for the year among the 10 major stock sectors. This past week Financials continued to rally, while dividend-paying sectors (Utilities, REITs) again lagged.

Bonds: Just as dividend-paying stocks have struggled recently it has been a tough couple weeks for bonds, specifically the more conservative flavors like Treasuries and Investment-Grade Corporates (both of which we own). I swear I am not only saying this now, but I suspected this rough patch might happen based on analysis I did two weeks ago following the tear that bonds had been on during May and June. We do not react to small timeframes, particularly when the longer-term, weekly view still looks good for bonds.

No bad breadth: One thing that has helped stocks combat a big sell-off this year has been the technical concept of "breadth" that I often reference. Specifically, the ratio of companies whose share prices are above their 200-day trailing averages. The 200-day moving average is a good indicator because it reflects the long-term price trend and we do not like to fight long-term trends. The higher the ratio of collective S&P 500 companies above their respective 200-day moving averages the more the market is rising together, which is good. The lower that ratio the more the market is falling together, which is bad.

Right now, 71% of the 500 companies in the S&P 500 are above their 200-day averages. This is stable, if not strong. If that ratio falls below 60% I may begin to worry, but breadth has held above that threshold for well over a year. We do not look at this in a vacuum, but it does help supplement other analysis.

In Our Opinion...

Have you ever heard someone say something along the lines of...

"Stocks are expensive."
"The market is overpriced."

"This is definitely a bubble."

I certainly have and am not much of a fan. But what do these statements mean?

They all imply roughly the same thing: The stock market is not worth buying because a drop is coming. Sometimes this premise is based on something statistical, like a price-to-earnings ratio. Sometimes it is based on nothing more than what they heard someone else say (i.e. coworker, friend, neighbor, TV talking head).

Most often it is rooted in nothing more than fear, which is damaging when it begins to stifle your investment decisions without just cause. I have no problem with someone saying the market will skyrocket or crater, so long as there is a measurable, process-based reason for the claim. I will find reason at some point in the future for believing that the market will fall. But I track market conditions daily and use what I believe are consistent and sound methods. I also avoid hyperbole because I realize that no method is perfect and the market has a way of humbling you very quickly if you become too presumptive.

Be careful to distinguish noise from knowledge because loud, unsubstantiated claims are easy to come by.

In Our Portfolios...

(Note: Each client's account is uniquely managed, based on account size and risk tolerance. Your account will only own some, not all, of the investments bought and sold over time.)

Financial Planning/Q&A...

My wife called me last Thursday freaking out.

She received a voicemail from the IRS informing her that she had committed tax evasion for the years 2010 through 2015 and was going to be arrested within 72 hours. The recording was detailed and when she returned the call the representative on the other end was thorough articulating the "crimes" she had committed.

Moments into her explaining this via text, I quickly interjected to say it was a scam.

These types of calls are apparently way too common. If you ever get a call from someone saying they represent the IRS, do not provide any personal information and certainly do not provide any payment information. If you receive a letter in the mail, scan and email me a copy of it before you do anything. Scammers have gotten very good at mailing out what appear to be legitimate IRS-issued notices requesting payment. Bottom line: If you receive such a notice, do not do anything until you have consulted either myself, Gale or your CPA.

Here is information pulled directly from the IRS website. Note the four things that the IRS says it will never do, but which scammers attempt to pull off.

(source: www.IRS.gov)

Luckily for us, my wife did not provide any information and promptly hung up when I texted her to do so. Crisis averted.

What's New With Us?

Quick reminder... To access your monthly fee statements you must login to the Morningstar Client Web Portal. You should have already set up your access, but if you have not, I can re-send you instructions. One of the benefits of adding Morningstar is the ability for us to automate fee summaries. So when you receive an email from Morningstar each month, it likely pertains to the fact that I have posted your latest fee summary for your viewing purposes.

Have a great weekend!

 

Brian E Betz, CFP®
Principal

Accord-Cutting: Trump Withdraws U.S. From Paris Agreement

In The News...

I learned something new this past week.

I learned that there is an international pact called the Paris Agreement, in which member nations band together to promote climate change and combat global warming. I had never heard of this accord until a few days ago when President Trump made the controversial decision to withdraw the U.S. from it.

All in favor: As best I understand it, those who favor the Paris Agreement believe it reflects a necessary, joint commitment to fight the scientifically proven fact that ongoing pollution causes the Earth's temperature to gradually rise, threatening both global economic growth and the lives of future generations.

All opposed: Those who agree with Trump's decision to ditch the Paris Agreement believe it will help the U.S. economy by preserving domestic jobs in industries that produce fossil-fuel based energy, such as coal. In Trump's case, there is debate over whether this is more about him believing the Paris Agreement simply represents a "bad deal" that he will later renegotiate, versus a staunch disbelief/disregard of global warming.

I have never really taken time to research global warming. I have tapped a number of people on both sides and most seem to accept global warming due to scientific evidence. I plan to learn more about it, but in the meantime cannot offer much opinion until I do. My thoughts on how this topic relates to the work financial advisers do in the Opinion section below.

Seattle for the win: Seattle housing led the nation in price growth for yet another month, and the gap is widening. The latest S&P/Case-Shiller report shows Seattle homes were up +2.6% in March and +12.3% over the past year. That double-digit annual growth not only laps the rest of the nation, which grew +5.8%, but is +3.0% higher than the next-closest city (Portland).

Here is a complete city-by-city look at the 20 major housing markets:

Why Seattle? The Pacific Northwest, particularly Seattle, continues to benefit from a few factors.

  1. Housing prices became so hot in areas of California, namely the Silicon Valley, that businesses (and consequently their employees) have migrated north.
  2. Seattle was a hotbed for innovation before any Silicon Valley migration.
  3. Seattle is tech-heavy but not tech-dependent, which is something often overlooked. There is great commerce balance, considering non-tech giants like Starbucks and Boeing are based here.
  4. Globalization continues to "flatten" the world, so it is not as daunting for younger workers to move to an isolated area like the Pacific Northwest (stigmas and all).
  5. Finally... Amazon (enough said).

As I have said before, at some point Seattle will level off similar to San Francisco. But for now the housing wave remains strong for existing homeowners and becomes more challenging for first-time homebuyers.

In The Market...

The S&P 500 climbed +1.0% this past week. Let's look under the hood...

(source of price data: Yahoo Finance)

Stocks: Another strong week for stocks, as only Financials and Energy were in the red. Every other sector was up at least +1.0%, which is bullish. We continue to hold Utilities (XLU) across all client accounts. We also own either the Nasdaq-100 fund (QQQ) or S&P 500-index fund (IVV) as well, depending on account size. Real Estate (VNQ) is a fund that larger accounts or more aggressive accounts continue to own. We have yet to see the rally I had anticipated in that sector, but Real Estate was up like most sectors last week, which is positive.

Bonds: Another week where bonds were unshaken despite a stock rally. Most accounts continue to own Investment-Grade Corporate Bonds (LQD) as well as High-Yield Bonds (HYG or JNK). On Friday, Long-Term Treasuries (TLT) rallied more than +1.0%. Treasuries may be primed to rally further in the weeks ahead, as I have written at-length in the past few months. I have said I thought that interest rates would fall and so far they have. But conditions can change quickly, so no time to dwell on history.

Did investors "go away" in May? Not so much... The S&P 500, when including dividends, gained +1.4% in May while the Nasdaq-100 was up nearly triple that, rising +3.9%. I mention the Nasdaq-100 because it tends to be more reflective of "risk-on" investor behavior, meaning investors are showing greater risk appetite. The Nasdaq-100 is predominantly comprised of stocks in the Tech and Consumer Discretionary sectors, two areas that are more cyclical (meaning they rise more compared to the overall market during positive periods and fall more comparatively when the market is down).

2,400 and gone? Excluding dividends, the S&P 500 index surpassed 2,400 on its third attempt in late-May and appears poised to rally further. Take a look...

(chart created via stockcharts.com)

The dashed line reflects 2,400 on this daily chart (each candle on the big chart represents a day). I am interested to see whether this rally sustains into the summer months, especially into August, when volatility often picks up. Right now, stocks continue to look good based on our technical analysis.

In Our Opinion...

It is okay to say I don't know.

I do not give uneducated or inauthentic answers to questions relating to investing or financial planning. So when I am asked what impact leaving the Paris Agreement will have on the market or economy, I cannot give an answer.

As mentioned I have taken no time to learn about global warming, so I am not ashamed to admit I had no idea an international agreement even existed in the first place. In fact, I would still have no idea had headlines not erupted following Trump's decision to remove the U.S. from participating in it. Yet, in 2017 it seems we are supposed to have an immediate and steadfast opinion on matters like this.

Unfortunately, I don't. At least until I learn more. If someone says the agreement is bad "because it will kill jobs" without providing employment stats, or says it is good "because it's science" without detailed scientific evidence, I am not going to naively choose either side.

The same thing applies to investing and financial planning. For example, two questions I received just this past week that are difficult to answer:

  • I hear gold prices are going to skyrocket when the economy tanks. Should I sell and buy gold?
  • Snapchat just went public. Should I buy it?

The first question is tough to answer, although I know a lot about gold. It is tough because this specific question, which I get from time to time, often comes from a place of cynicism. The person is usually very pessimistic and believes the world is going to implode (gold prices usually rise when stock prices plunge, which is the logic here).

Part of my job is to assuage such fear. We would not be in this business if we felt the market was constantly on the verge of collapse. But some people simply believe each year will be 2008, despite any rationalization provided to the contrary. With that mindset being as strong as it often is, sometimes nothing can be said to overcome those concerns.

The second question, relating to Snapchat, is impossible to answer. Our investment approach relies on past price history and Snapchat, like any company that goes public, by definition has no price history. I get why people like IPOs -- the media attention makes them sexy to invest in. Plus, a lot of people think every tech company that goes public will be the next Google (a dangerous mentality to have). So while I could give an opinion on Snapchat, the responsible thing to do is say "I am not sure" when asked if it is a smart investment. As price trends develop over time, only then will I feel comfortable voicing my opinion.

So if you ask me a question that I am not educated on, I will likely research it and get back to you. It is okay to say I am not sure or I don't know.

In Our Portfolios...

Stocks: Purchased the Nasdaq-100 fund (QQQ) for accounts above $50,000 and the S&P 500 index fund (IVV) for accounts below $50,000. For accounts that own individual stocks (certain portfolios above $150,000), we sold Oracle.

Bonds: Purchased the Long-Term Treasuries fund (TLT) for certain accounts and will look to add this for additional accounts into next week.

Q&A/Financial Planning...

If you are a parent or grandparent to young kids, I thought I would share a decision that my wife and I personally made this past week. We opened a 529 college savings plan for our infant daughter, Brooklyn. We chose the Utah Educational Savings Plan (UESP) due to its low cost structure, strong Morningstar rating and flexibility for me to manage the account. (Most plans have a "set it and forget it" approach that automatically shifts from stocks to bonds as the child nears age 18, but our situation is obviously unique in that I am capable of managing the funds and desire to do so.)

529 plans provide two chief benefits when saving for college:

  1. Account earnings grow tax-free, meaning you are not taxed if used to fund future college expenses. If you start early enough and contribute a lot, earnings can comprise a big chunk of the eventual balance, which means big tax savings.
  2. Such plans provide a defined structure, which instills good savings discipline/behavior if proper financial planning is conducted at inception.

There is some flexibility too. For instance, if there are multiple children and the designated child does not go to college, you can change beneficiaries to another child that does go to college.

There are some distinct disadvantages, or at least pitfalls to know:

  • If funds are withdrawn for uses other than college expenses, all earnings are not only taxed as ordinary income but penalized 10% as well.
  • If you do not properly plan and save the right amount over time, you can quickly fall behind as your child ages. This means you diminish the tax advantages and the overall point of having the plan.
  • If structured incorrectly, particularly with grandparent-owned 529 plans, you could face adverse tax and financial aid consequences in the future (which I won't detail here, but contact me for more).

I generally recommend 529 plans, but only for motivated parents and grandparents who execute on the savings behavior required to achieve their goal. For us, we plan on saving to accommodate 3 years of college education for our daughter (while using other funds, potential scholarships or student debt to pay for the fourth year). Among the other mathematical factors that went into determining how much we need to save, I based it on a tuition cost of $25,000 per-year (in today's dollars), a 5% college inflation rate and an annual 7% investment growth rate over the next 18 years.

I am happy to share why this math is necessary. Let me know if you have any questions on 529 plans, or college savings in general.

What's New With Us?

For those of you who receive monthly performance summaries via Morningstar, please know that the May summaries will be delayed. Due to the migration from Scottrade to TD Ameritrade, I am working through a project to merge account histories within Morningstar. Once that project is complete I will send out May summaries. If you have not previously received a monthly performance summary and would like to begin receiving them, just ask.

Have a great remaining weekend!

 

Brian E Betz, CFP®
Principal

Something To Know About Mortgage Refinancing And Something To Forget About Stock Prices

In The News...

Another month in the books in 2017.

The U.S. market, per the S&P 500, gained +1.0% in April. It was a nice bump higher considering stocks had been slipping over the six-week stretch from March 1st to mid-April. The last two weeks was a nice bounce that helped the market finish positive for the month.

Seattle housing laps the nation: Home prices rose slightly in February and by an average of +5.8% annually, according to the latest S&P/Case-Shiller housing report. Seattle continues to dominate real estate, where prices are up +2% month-over-month and +12% over the past year. Seattle housing growth has doubled the national average in recent months and maintains a sizable lead over the #2 housing market, Portland, where prices have risen +9.7% annually. Here is a complete city-by-city look at the 20 major markets:

(source: S&P/Case-Shiller Home Price Index)

Seattle has thrived thanks to the success of Amazon and Boeing, the reemergence of Microsoft and the ongoing technology migration. I would suspect that home values will level off a bit next year, meaning a slower pace of price increases. That would channel a pattern already experienced by San Francisco, where prices led the nation for a very long time before the pace of growth began to slow a bit in late-2016.

In The Market...

The S&P 500 gained +1.4% last week. Let's look under the hood...

(data source: Yahoo Finance)

Stocks: Stocks sprang higher to start last week and held those gains the rest of the way. Health Care, Technology and Consumer Discretionary led while only Real Estate lagged.

Bonds: High-yield bonds and preferred stock steadily rose again. Treasury bonds sold off, causing interest rates to jump. Despite last week's decline, I actually believe we may see interest rates fall again here in the next few weeks. If you are interested in knowing why, let me know -- I am happy to share my analysis.

Earnings bonanza! As of Friday, April 28th, roughly half (58%) of the 500 companies in the S&P index had reported quarterly results. Both revenue and earnings growth are the highest since 2011, as sales and profits are up +7.5% and +12.5%, respectively (per Factset). Sales and profits have risen across all 10 stock sectors, which reflects broad market strength rather than leadership by a few, concentrated sectors. Forty percent of S&P 500 companies have yet to report, so while impressive, these numbers are still preliminary.

In Our Opinion...

Stock price does not matter. Let me explain.

Amazon stock price recently surpassed $900. A lot of people would consider this expensive. To think that $900 would only get you one Amazon share does not feel as worthwhile as buying a bunch of shares of a much cheaper stock.

All else being equal though, price does not matter.

Instead of buying Amazon, let's say you use $900 to buy 10 shares of Kraft (currently priced around $90). If the price of Kraft goes up 10% to $99, will you earn more or less than if your one share of Amazon goes up by 10% from $900 to $990?

Neither.

A 10% gain is a 10% gain, regardless if you own one share that costs $1,000 or 1,000 shares that cost $1 apiece. You will cumulatively earn the exact same dollar amount. I prefaced this with "all else being equal" because, clearly, no two companies are alike. Amazon and Kraft are entirely different businesses whose stock prices have separate supply and demand characteristics.

"Yeah, but what if the higher-priced stock splits and I double my shares?"

That is fine, but on paper there is no benefit to a stock split. Your equity does not change. The stock price proportionally adjusts to the size of the split.

2-for-1 split? The share price is cut in half.
3-for-1 split? The price is slashed by one-third.

There is some merit to believing that a lower stock price will enable and encourage more investors to buy the stock, which increases demand and subsequently its price. While that may be true in theory, it is pure speculation. If you buy a stock in hopes that it will split, or continue holding it for only that reason, you may want to rethink your decision.

We put zero emphasis on a stock's price in terms of the number of shares that can be purchased. Neither should you.

In Our Portfolios...

Stocks: No changes this week.

Bonds: We bought an investment-grade bond fund (LQD) for our conservative and moderate accounts.

Q&A/Financial Planning...

I am helping a client refinance their home mortgage, which will allow them to lower their interest rate, as well as lock in a fixed percentage and dispose of their current, variable rate.

We often think about refinancing as "saving money". On the surface this is true. If you go from a 5.0% 30-year fixed rate to a 4.3% 30-year fixed rate you are saving on interest once you get passed what I call the break-even date. Since it costs you something to refinance, I like to calculate the number of months it will take to make that money back through interest savings. I find the break-even date by dividing the interest dollars saved per-month into the cost to refinance.

But there is another thing to remember, especially the closer you are to retirement. If your new loan term is longer than the remaining years on your existing loan, your loan payoff date gets pushed out. This is quite common, as many people will be 5 or 10 years into their existing mortgage and choose to refinance into a 30-year fixed loan. It has been especially popular the past few years, as interest rates have fallen and homeowners have recovered equity post-2009.

Pushing out your payoff date is not a problem if you have the right plan. It is something to be aware of, particularly if your goal is to pay off your mortgage by a certain date. If you are refinancing then presumably your monthly payment is going down (unless you are taking on a shorter-term loan). You want to be responsible with the newfound "savings". Consider using that extra money to do one of the following:

  1. Make an additional, lump-sum mortgage payment each year
  2. Pay off other debts - either non-productive debts (e.g. credit cards) or those with higher interest rates compared to your mortgage
  3. Invest the extra cash to help save toward retirement, which also enables you to make a greater lump-sum mortgage payment in the future
  4. Sock it away as cash to build up a cushion for emergencies

Let me know if you have questions. Our friends at North Pacific Mortgage can help if you are interested in refinancing. I always advocate considering what options are available to you, but it is equally important to understand the ramifications before doing so.

What's New With Us?

We have begun setting up accounts at TD Ameritrade. Once most accounts are established, I will send you a second round of Docusign forms to e-sign. This will include the account transfer request, as well as a form for making contributions or distributions (if applicable). Let me know if you have any questions about this process. My goal is to have most accounts transferred by the end of May.

Have a great week!

 

Brian E Betz, CFP®
Principal

Home Prices Keep Rising. Homeownership Keeps Falling. Huh?

In The News...

How valuable is real estate exactly?

Like anything else, real estate is only as valuable as what someone else will pay for it. I mention this because I am helping a client of ours value their business, and in doing so, discussed the value of real estate in 5 to 10 years time (when they plan to sell their business). These business owners rent their building space, which they think could prevent them from getting top-dollar upon sale.

Hold on, I said. That may not be a bad thing. If they owned the property they would struggle to find a buyer to pay 100 cents on the dollar for it, as it is commercial space and the purchasing company would likely integrate them into their existing operations, conducted elsewhere. That was my initial reaction. My second reaction relates to this:

(image via YahooFinance)

Yes, that is a vending machine mounted into what used to be a department store entrance inside of a shopping mall. More and more retail spaces are vacating as consumers purchase online (Amazon, etc.). Our client does not operate within a mall, nor do they own a retail store. But that may not matter. Property owners will feel the impact as online expansion has a trickle-down effect. If you have heard the phrase "a rising tide lifts all ships", this is the opposite. Commercial real estate growth will slow as brick and mortar businesses shrink their collective footprint.

As a result, owning the property might present greater challenges to our client in the event of a sale, particularly if they have debt attached to it. So not only would they struggle to get full value for the property, but their equity at-sale would be further reduced by any residual mortgage debt (if present).

Seattle real estate leads the nation (again): Residential real estate holds steady. The latest Case-Shiller housing report shows home prices were up nearly +6% year-over-year, as of January-end. Seattle was tops among major U.S. cities, up an impressive +11.3% annually, which nearly doubled the national average. Take a look at the price breakdown by major market:

Where have all the homeowners gone? Despite the nice rebound in housing prices since the 2011 bottom, homeownership has not recovered with it. This next chart is confounding, as it shows the decline in homeowners, which started over a decade ago:

Only 64% of Americans own homes, down -6% since 2005 and rivaling lows not seen since the 1960s. I discuss why this might be in the Opinion section below.

In The Market...

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

(data source: Yahoo Finance)

Since I didn't send out a weekly recap last week, I didn't get a chance to talk about quarter-end. The previous Friday was both March-end and the end of Q1. The first quarter was strong for stocks. Here are some highlights/takeaways from the first three months of 2017:

  • S&P 500 climbed nearly +6.0% in the first three months of 2017 (including dividends)
  • Nine of the 10 major stock sectors were positive in Q1 (Energy was negative)
  • Technology was the best-performing sector, up +10.7% (XLK)
  • Tech-heavy Nasdaq-100 index rose +12.0%, outperforming the S&P index
  • 79% of S&P 500 stocks were above their 200-day average price at quarter-end, which is bullish
  • Bonds were positive across the board, led by high-yield bonds and preferred stock
  • S&P was essentially flat in March, meaning all of the quarterly gains occurred in Jan/Feb.

That last point is important. A few weeks back I mentioned that the overall market might flatten out for a period of time and that is exactly what we have seen. Take a look at this chart of the S&P index and notice that since touching a value of 2,400 back on March 1st, the S&P 500 has not returned there since.

(chart via Stockcharts.com)

More importantly, Relative Strength (RSI, the upper chart) has been falling. This is often a good leading indicator of future price. In this case, if RSI falls much further below 50.0 we likely will see stocks slide further in the near future. The long-term picture still looks bullish though, when looking out weeks and months. That is important because I believe it means investors are in "buy the dip" mode rather than "sell the rally" mode.

At the end of the quarter our primary stock holding is a Consumer Discretionary fund (XLY). We had previously held a Materials sector fund (XLB) up until two weeks ago. As a result, we hold a cash position across most accounts that we will look to reinvest in the near future.

In Our Opinion...

Continuing my earlier thoughts on real estate, how is it that home prices are rising but homeownership is not? Here a few reasons to consider:

  • We are evolving into a society of "renters" as much as "owners", whether by choice or by force. For example, 31% of people lease cars rather than buy them. This is up from 25% a few years prior.
  • The average worker changes jobs more frequently than ever, an average of 10 to 15 times in their career. This makes buying a home less appealing if the job change requires a geographical move.
  • Real estate prices have outpaced wage growth, making it more difficult to keep pace with home prices.
  • However, many prospective buyers simply have not saved enough to accommodate a 20% down payment, or an amount close to that.
  • Some people are still reluctant to buy due to fear that another housing crisis looms.
  • The average person gets married in their late-20s, as compared to Baby Boomers who wed in their early 20s. Marriage is the most common life event that precedes buying a home, which means there is a large pool of working 20-somethings who have yet to buy.

I'd be curious to know what you all think explains the rise in home prices and subsequent decline in ownership.

In Our Portfolios...

Stocks: We sold our Materials fund (XLB), which was owned within most client accounts. We will use the proceeds to most likely buy a Utilities fund (XLU) or a Nasdaq-100 index fund (QQQ).

Bonds: We sold a high-yield bond fund (ANGL) within accounts that owned it. We still own another high-yield bond fund (HYG) across certain accounts.

Q&A / Financial Planning...

This is your last week to make IRA contributions for 2016. If you wait past tax day you will lose the ability to contribute for last year, which matters if you want to deposit more than the following annual limits:

Under age 50: $5,500
Age 50 or older: $6,500

The annual limit applies across all IRAs you own, so while a 40-year-old could contribute $2,000 to one IRA and $3,500 to another, their combined contributions cannot exceed $5,500. However, if you already participate in a retirement plan through work beware of the tax deduction restrictions if you earn above a certain level. Contact Gale or myself if you have questions.

What's New With Us?

We will begin migrating accounts from Scottrade to TD Ameritrade this week. We will be in touch regarding the forms required. My hope is to make this a quick, seamless process. Again, I view this as a positive move for both you as clients and our firm as a whole.

Have a great week,

 

Brian E Betz, CFP®
Principal

Seattle Real Estate Leads The Nation In Price Growth

In The News...

Here is a list of the major U.S. cities where housing prices have grown by double-digits over the past year:

1. Seattle
2. Portland

That is the list.

Across the country home prices are up +5.8% annually, according to the national average supplied by the latest S&P/Case-Shiller housing report. Seattle and Portland have doubled that mark, up +10.8% and +10.0%, respectively. The West Coast has benefited most from the housing market recovery, thanks to a strong job market and technological growth. However, whereas cities like San Francisco have cooled off a bit in the past six months, the Pacific Northwest continues to surge.

Businesses, namely tech firms, have found Seattle to be a great supplement to comparably pricier areas in California. Google, Facebook and Salesforce are among those that have expanded north from the Silicon Valley, taking advantage of cheaper real estate. Add that to an already robust foundation created by Amazon, Boeing, Costco, Microsoft, Starbucks, etc. and any additional business migration is icing on the cake for the greater Seattle area.

As the housing market thrives in Seattle the question becomes: If the price-gap narrows between Seattle and metropolitan California, will Seattle real estate similarly begin to slow? One interesting statistic I found is that Washington is one of four states where the most common job title is "Software Developer". Not even California can say that.

(source: NPR)

Does this mean Seattle is more sensitive to a tech slowdown than other parts of the country? Sure. But notice that the most common job title is "Truck Driver" in the majority of states, so it might be an easier conclusion to draw if Truck Driver was exempted so that we could see the next-highest job classification in those states.

It is not news that Seattle and Portland real estate are strong. What is news is that these areas have consistently led the nation over the past few years and the gap between these cities and the rest of the country has widened. Here is a look at the complete list of 20 major cities.

In The Market...

The S&P 500 fell -0.3% last week. Let's look under the hood:

The six-week winning streak for the S&P 500 came to an end. It was a worse week than the -0.3% decline implies, as the majority of stock sectors were negative. Technology led the way, while Energy and dividend-paying sectors lagged (Real Estate, Utilities).

If you recall my suggestion from two weeks ago that the bond market may be poised to break out, that clearly has not been the case. It was the worst week for the bond market in recent memory. I have a close eye on the bond market given our positions in both high-yield bonds and preferred stock. High-yield bonds often foreshadow what is to come within the stock market. If last week is an indication, it could be a bumpy couple weeks ahead for stocks.

In Our Opinion...

Investor sentiment worsened sharply last week. The percentage of respondents who feel positive (bullish) about the market looking ahead dipped from 38% to 30% in the latest AAII survey. The percentage of those who have a negative (bearish) market outlook spiked from 35% to 47%.

The 16% spread between the 46% who are bearish and the 30% who are positive is the largest negative gap in over a year. A bearish jump of that magnitude is pretty rare and is usually followed by a sell-off. I don't like speaking in absolutes, but the data bears that out pretty consistently when I look back at how the S&P 500 has reacted following similar spikes in Dec. 2015, Aug. 2015, May 2013 and May 2012. Then again, pessimism has helped fuel this rally dating back to last fall.

The AAII investor sentiment reading is just one subjective indicator. We do not emphasize it. Since respondents are effectively asked how they feel the market will perform in the future, the recent rally may provide context for them to assume the market is "due for a drop". (I intentionally use quotations because it is a common phrase I hear all the time.) Oftentimes though a rally has legs much longer than most realize. Market rallies tend to beget bigger rallies. So even if we do see a market decline in the near future, it could be short-lived.

Let's see how the next few weeks plays out.

In Our Portfolios...

Stocks: No changes.
Bonds: No changes.

Q&A / Financial Planning...

As I review 401k accounts for many of you and others this spring, one thing I see is misalignment between someone's tax needs and how they contribute to their 401k account (pre-tax vs. Roth). If your 401k plan does not offer a Roth option, this likely does not apply. But if it does, take a look at your contribution choices.

Pre-tax 401k salary deferral: Your contributions avoid taxes today. In exchange you defer taxes on those dollars, plus earnings, until you begin taking withdrawals in retirement. At that time you pay taxes on any distributions.

Roth 401k salary deferral: Your contributions are taxed today. In exchange, any earnings grow tax-free. When you begin taking withdrawals in retirement you pay no taxes.

On its face the Roth option seems like the better bet. No one likes paying taxes and tax-free is better than tax-later. But that is not necessarily true. If you are in a high tax bracket because you make a lot of money, it may be wiser to use the pre-tax/tax-deferred option. If your tax bracket will be considerably lower in retirement (an unknown, I know) it might make sense to avoid taxes today and instead pay them on the back end.

I mention this because I do see some people overload on the Roth option when their greater need is for tax reductions today. You can contribute up to $18,000 into your 401k ($24,000 if age 50), which is sheltered from taxation. Also, if you switch jobs or retire, you have the option of converting those tax-deferred funds into Roth funds. I often recommend this for clients who experience an unusually low income year because it allows them to convert at a lower tax rate, reducing their tax burden and providing tax-free growth from that point forward.

If you feel your 401k contributions may not align with your tax needs, contact Gale or myself. (Note that this applies if you own a 403b or 457 plan and a Roth option is offered. I just say "401k" for simplicity.)

What's New With Us...

As a reminder, if I haven't spoken with you about the change from Scottrade to TD Ameritrade, don't worry, I will be in touch soon.

Enjoy your week everyone!

 

Brian E. Betz, CFP®
Principal