Stocks Fall For A 3rd-Straight Week

Hi everyone,

Below is this week’s blog. As mentioned, we are transitioning this from the written format to video form. If you want to skip ahead to certain sections, here is a summary of what I discuss this week:

  • Josh’s blog on the Federal Reserve (0:30)

  • Did you receive a tax Form 5498? (1:00)

  • Weekly stock sector performance (1:50)

  • Analysis of the overall market via S&P 500 (3:20)

  • Portfolio activity (6:25)

  • Financial planning using Right Capital (8:38)

I mentioned it in the video but will say it again — I welcome your feedback. My goal is to ensure we’re providing useful information so if you have opinions, please share. (The quality will improve too over time as I get more accustomed to creating these.)

Have a great week!

Brian E Betz, CFP®
Principal

3 Tax Tips And A New Stock Market High

Hi everyone,

As a follow-up to our recent recommendation to start planning your 2019 taxes, Josh Baird wrote a useful blog post highlighting 3 tax tips for 2019, which you can READ HERE. I encourage you to read it in light of the recent tax law changes.

The U.S. stock market closed last week at a new all-time high of 2,940 for the S&P 500 (not including dividends). Let’s dive right into that and more. 

In The Market...

The S&P 500 gained +1.2% last week. Let's look under the hood:

(price data via stockcharts.com)

I have said it time and time again. New record highs are bullish, not bearish. The S&P 500 did just that last week. The more separation the S&P index gets from it previous highs set back in 2018, the less likely stock prices will flatten out for a few weeks as I had expected and the more likely it is that a bigger rally will ensue. Take a look:

(chart created via stockcharts.com)

There is not a whole lot to nitpick right now. A number of factors support the continuation of this rally:

  • When looking at the price trend of the S&P index, both short-term and long-term timeframes appear bullish.

  • Relative Strength (RSI) reflects that there is a tailwind of momentum behind the rally. This is the smaller of the two charts above.

  • There still seems to be a decent dose of pessimism among investors. Pessimism usually leads to gains.

  • There is good breadth among the 10 sectors that comprise the market. This means that, for the most part, the sectors are rising in unison rather than a few sectors doing all the heavy lifting to push the S&P higher.

There is one thing worth remembering, however. The last time the market was in a similar position back in Sept. 2018, it appeared as if stocks were primed to really zoom higher. In that instance, the index only ended up eclipsing the previous record high (set in Jan. 2018) by roughly +3% before the bottom fell out in early October. So the thing to remember here is that while a sell-off may not be likely, if it does happen it could be swift and sharp.

In Our Portfolios...


What's New With Us?

I want to remind everyone that our new financial planning software is readily available if you would like us to map out your plan. Let us know — it might be worthwhile if you have wanted to gain better clarity or instill better discipline around your long-term financial plan.

Have a great week!

Brian E Betz, CFP®
Principal

Get A Jump On Tax Planning

Hi everyone,

I want to make a request. If you know someone who could benefit from our service and expertise, we would appreciate referrals you have to potential clients. We want to add some new clients over the next year, but as always, want to make sure it is a mutual fit as well. Thank you in advance!

2019 Tax Planning: Assuming you filed before today, tax season is over. For most of you, taxes are something you deal with and then ignore for 11 months until it is time to file again. However, now is the perfect time to get a jump on tax planning for 2019, particularly given the significant tax law changes that went into effect. (If you prepped and filed your own taxes then you know what I’m talking about because the Form 1040 alone has a very different look than it did under the old tax code.)

Josh is writing a post on some tax tips for 2019, which we will post sometime next week. If you would like to discuss measures you can take to be more tax-efficient in 2019, let us know.

In The Market...

The S&P 500 gained +0.5% last week. Let's look under the hood:

(price data via stockcharts.com)

Stocks rose for the third-straight week, finishing with a nice jump on Friday. The S&P 500 closed above 2,900 and is now just 1% below its previous record high from Sept. 2018. It was a pretty quiet week considering that stocks are approaching all-time highs.

The following weekly chart of the S&P 500 illustrates how far stock prices have rallied back to get to where they are. There are a couple things I want to highlight, starting with just the price movement of the index. Take a look:

(chart created via stockcharts.com)

Notice how the S&P 500 has clawed back to the previous high. If you look at the smaller chart above it, that blue line reflects the increasing number of stock prices that are above their respective 200-day moving averages. Currently, 73% are above, which bodes well for the longer-term outlook because it shows that the overall market is rising as a whole (rather than it being driven by a few areas).

The S&P is so close to its previous high though that I suspect we may see some stagnation over the next few weeks. Then again, I thought volatility would pick up in March and we really didn’t see too much of that.

Technology still looks like the strongest sector, which is reflected in our portfolio allocations. We added to our Cloud-Computing Tech fund (SKYY) this past week and continue to own a Tech-heavy index fund (SPLG) as well as a Semiconductor fund (XSD) in most accounts.

On the bond side we added a Long-Term Treasury fund (SPTL) to many accounts. Despite the late-week slide I think the Treasury market remains appealing in the weeks ahead.

In Our Portfolios...


What's New With Us?

This past weekend was great. We are almost done with a yard project we have been planning for a long time, Tiger won the Masters and Game of Thrones finally returned after a 2-year wait.

Have a great week!

Brian E Betz, CFP®
Principal

Now Is Your Chance...

Hi everyone,

If you were freaking out in December when stock prices dove -15% in a matter of 3 weeks.
If you were worried prices would fall even further and you would lose more money.
If you wished you had sold some investments prior to that happening.

Now is your chance.

The S&P 500 index is a sand wedge away from its all-time high of 2,940, which it set back in late-September. Stock prices have rebounded most of the way back to previous levels, which means you have a chance to rewrite history and do things differently if you want.

But you won’t.

Whether due to recency bias or something else, there is usually a contrast between what we say we will do and what we actually do. The fear that plagued so many investors months ago shifts back to greed as prices rally back. No matter how much you convinced yourself you would not get caught flat-footed the next time around, when that next time comes around the result is more inertia.

The thing is, that is probably the right call.

Suppose you do sell, the feeling of satisfaction you get is short-lived. The pride you feel in knowing you executed what you said you would do is soon overshadowed by the next decision you have to make…

Now what?

If you are right and stock prices do plunge again, you may think you are smarter than the average investor but what is your next move? When do you buy back in?

If you are wrong and stock prices zoom higher to new record highs, will you maintain your conviction that those gains will be fleeting? Or, will you be compelled to buy back in at those higher prices?

My point here is to expose the likelihood that while you think you are making informed decisions you are really just winging it. There is no process that informs your decisions to buy and sell. The decision-making is 90% emotional, 10% intellectual.

If you do have a process, there is easily an argument to be made in favor of selling at these price levels. Or at least reducing some of your stock exposure. But if you don’t have a process then doing nothing is likely your best choice. The stock market has 100 years of history to show that it moves higher in the long run. That is a tough trend to fight. You can certainly maneuver around it, but it requires a disciplined process.

Nonetheless, if you are hellbent on not getting caught with your pants down again, now is your chance. 

In The Market...

The S&P 500 +2.2% last week. Let's look under the hood:

(price data via stockcharts.com)

I obviously mentioned it above, but the S&P 500 is back within a percentage point or so from its previous all-time high. Last week was a quintessential “risk on” week, where investors preferred the more aggressive pockets of the market like Materials, Consumer Discretionary and Technology. Conversely, Treasury rates climbed higher as investors sold those relatively safer bond investments.

While market conditions continue to look good, we are no doubt on alert that a potential wave of selling could ensue now that stock prices are back to their previous highs. Many of the momentum indicators we care about have improved nicely and they must continue to do so in order for stock prices to really break out higher to fresh highs.

Portfolio-wise, we sold a S&P 500 index fund and replaced it with a Semiconductor sector fund (XSD). The aim here is that Semiconductor stocks have simply shown stronger price momentum relative to other areas, which validated the decision to buy. 

In Our Portfolios...


What's New With Us?

Check out our latest video, which explains the tax benefits of doing a 1031 Exchange. If you own a rental property, you should definitely check this out. 

Have a great week!

Brian E Betz, CFP®
Principal

What To Know About Employee Stock Purchase Plans (ESPP)

Hi everyone,

We created a brief video explaining Employee Stock Purchase Plans (ESPP). We discuss how an ESPP works, the benefits of such a plan and the tax consequences that participants should understand. If you have an ESPP through your employer, take a look:

Similar to other videos we’ve created, this ESPP one is always available on our site, under: FAQ > ESPP

Speed up your mortgage payments? Last week I mentioned that it might be wiser to pay down your mortgage before saving for college. How so? Let’s explore…

Under the new tax laws the standard tax deduction increased from $12,000 to $24,000 for married couples ($6,000 to $12,000 for individuals). As a result, many taxpayers who previously itemized their deductions will now take the standard deduction.

If you historically itemized and your primary deductions are mortgage interest and property taxes, there is no tax benefit of paying those expenses moving forward if the sum of those things fall short of the standard deduction.

To illustrate this, consider the below example where a married couple owns a home valued at $500,000 and a mortgage of $250,000. If we assume a 1.0% property tax and a 4.5% interest rate on the mortgage, using rough math we can conclude that the sum of those two expenses are roughly $16,000 for a given year. Here is how the tax deductions compare under the previous tax laws (2017) versus the new tax laws (2018 and on):

Notice how this married couple would have itemized their deductions under the previous tax laws and now claim the standard deduction under the new laws. Since they now take the standard deduction their mortgage interest is no longer deducted, which means there is no tax advantage to carrying the mortgage.

What does this have to do with saving for college? Well, frankly it isn’t just saving for college. This applies to other savings that occur outside of tax-deferred retirement accounts as well. The question that needs to be asked is: Can I reasonably earn more by investing (after taxes) than I pay on my mortgage?

Obviously, the higher your mortgage rate the more you need to earn to justify the investment. But there is another factor, which is the risk component. In order to earn what you need, you have to assume some degree of investment risk. Assuming your mortgage is a 30-year fixed rate, there is no risk of that rate going up, which gives the edge to paying down the mortgage (in my opinion).

The trade-off of doing this is that you are obviously not allocating that money toward other savings goals. This means you would need to fund those with future income when the time comes. Ideally though, your mortgage would roll off sooner, which would free up that money to allocate toward other things like retirement, college, etc.

These new tax laws will sunset at the end of 2025. So this approach could be short-lived if things revert back to the way they were. For now though, consider reevaluating how you prioritize spending and savings.

In The Market...

The S&P 500 fell -0.7% last week. Let's look under the hood:

(price data via stockcharts.com)

It looked liked the market was poised to post another nice week of gains, only to have those wiped out (and then some) on Friday. The S&P index fell nearly -2.0% on Friday to end the week right at 2,800. This is no coincidence, as 2,800 was previously a key level that the index had failed to rise above. Now we will see if 2,800 provides support from which stock prices can rebound.

The bond market rallied nicely following the Federal Reserve’s announcement that there would likely be no additional interest rate increases in 2019. This contradicted previous indications that there would be one or two more rate hikes this year. That news boosted demand for longer-term bonds. The 10-year Treasury yield fell to 2.4%, which is the lowest since Dec. 2017. 

The notable addition we made last week was adding a High-Yield bond fund (SHYG) to more moderate accounts. High yields have rallied nicely in recent weeks and appear to be continuing that ascent.

In Our Portfolios...


What's New With Us?

I was over in Spokane on Friday meeting with a couple clients but am back in the office all week.

As an additional reminder, let us know if you would like to establish or refresh your financial plan. We recently implemented a new financial planning software through Right Capital. Our previous Microsoft Excel-based financial planning model worked well, but we finally reached a point where it made more sense to purchase a more user-friendly software to create and maintain financial plans.

Have a great week!

Brian E Betz, CFP®
Principal

Are You In For A Tax Season Surprise?

Hi everyone,

If you have yet to file your taxes, you will notice some significant changes. I mentioned these a year ago when the new tax laws passed, but now they really go into effect as tax returns are coming due for 2018.

The biggest changes have to do with deductions and exemptions. The standard deduction doubled from $6,000 to $12,000 for single tax filers and from $12,000 to $24,000 for married couples who file taxes jointly. This means fewer taxpayers will itemize their deductions. You will continue to itemize if the sum of things like your mortgage interest and property taxes paid exceed the standard deduction. If they do not, you will claim the higher standard deduction.

The benefit that many will enjoy from the doubling of the standard deduction will be offset to some degree by the elimination of personal/dependency exemptions. Historically you could claim an exemption for you, your spouse and each of your kids (as well as other dependents you care for, such as a grandparent or cousin who lives in your home). In 2017 the exemption was $4,050. So if you were married with 2 kids you could claim $16,200. You were phased out from being able to claim personal/dependent exemptions if you earned too much, but most taxpayers were able to benefit from this.

These exemptions are now gone and while a boost in the standard deduction may compensate for exemptions lost, for many it will not.

The best example of this would be the family whose itemized deductions tally between $20,000 and $25,000. These taxpayers probably won’t see their deduction total change much, only how they arrive there. They will either claim the increased standard deduction of $24,000 or they will claim their typical itemized deduction total, provided it exceeds the $24,000 standard deduction.

This family will feel it when their exemptions go from $8,000 (married couple) or $12,000 (married + 1 kid) or $16,000 (married + 2 kids) to zero. Said differently, the amount of income that is taxed will increase by whichever of these exemption amounts previously applied.

It is worth noting that the marginal tax brackets went down slightly. For instance, where taxable income between $76,000 and $153,000 was previously taxed at 25% for a married couple, taxable income between $77,000 and $165,000 is now taxed at 22%.

It is hard to say just how much the reduction in income tax rates will help in light of the increased standard deduction and removal of exemptions. Frankly, I think the changes in the tax brackets and corresponding rates is mostly window dressing.

The bottom line? Don’t be surprised if your tax bill is different than in years past. In light of the increased standard deduction, next week I will explain why it may be smarter to prioritize paying off your mortgage over saving for college.

In The Market...

The S&P 500 gained +3.0% last week. Let's look under the hood:

(price data via stockcharts.com)

A really solid week for stocks, for a number of reasons:

  • The S&P index crossed nicely above 2,800 (finishing at 2,822). This marked the highest weekly close since July 2018.

  • More importantly, the S&P cleared the previous price-high from early December. Back then, stock prices quickly reversed lower when they reached that point, losing roughly -15% before stabilizing. This matters greatly and needs to hold going into the next couple weeks.

  • Stock prices “gapped” higher in 4 of the 5 days last week, which is often a sign that a new rally is commencing. A “gap higher” is when a stock’s price opens the next market session measurably higher than where it closed the previous session. In this case, the gap higher I’m referencing is for the S&P 500 as a whole. This shows collective strength in the U.S. market.

  • Coming off of last week’s losses, I was curious how stocks would respond to start the new week. The S&P quickly jumped back above its 21-day moving average, which is another sign that investors were ready to buy the dip. (I don’t often discuss the 21-day moving average because it is such a short-term indicator, but I think it is relevant here.)

As crazy as this may have sounded back in December, the S&P 500 is back within a few percentage points of its previous record high. That value for the S&P index is 2,930. If this rally does continue toward that price (and I think it will), it will become much more difficult at that point for the rally to sustain. Why? Because I believe there will be plenty of investors looking to sell at that level, when we get there. This does not mean that I expect prices to plummet from there, but I would expect prices to stagnate for a time.

We added to our S&P 500 index funds early in the week. These were not major additions, but are still worth mentioning. We are nearly fully invested across most client accounts.

In Our Portfolios...


What's New With Us?

This is setting up to be a fantastic week. Spring is here, the temperature is supposed to reach 70 in Seattle and March Madness kicks off Thursday. Other than having to start mowing the yard again, it is nice to see more daylight and warmer weather.

Also, we added a new financial planning software that we will begin implementing during/after client reviews. If you are interested to learn more or apply it to your situation, let us know.

Have a great week!

Brian E Betz, CFP®
Principal

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 stockcharts.com)

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 stockcharts.com)

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®
Principal

Tax Forms And Social Security Reminders

Hi everyone,

A quick note about tax forms. If you own a taxable/brokerage account, your 1099 is ready. While we can email you that form today, we prefer to wait just in case there are revisions to it between now and the final version being issued. That final version of your Form 1099 should be available this week. When it is, Josh will securely email it to you using password-protection. The password to open the email will be the last four digits of your Social Security number (or the primary account owner if it is a joint account).

Check your Social Security! Last week I received an email from the Social Security Administration, which I have shared below. You may receive a similar email. If your Social Security profile is already set up on the website, I suspect you too would receive this notification. If you have not set up your profile, visit the SSA website here.

We highly recommend establishing your account online, so that you can check your earnings history for accuracy. After all, the figures shown are what will determine your eventual Social Security benefits (if they have not started yet). You can also see your current, estimated monthly benefit.

Let us know if you have any questions about this, or strategies for claiming Social Security in general.

In The Market...

The S&P 500 was essentially flat last week, gaining +0.1%. Let's look under the hood:

(price data via stockcharts.com)

It was a pretty mixed week for stocks. The bond market made more noise, as Treasuries and Corporate Bonds both gained nicely on the week.

One of the bigger developments has been the number of stocks that have risen above their respective 200-day moving averages. Back when the market bottomed just before Christmas, only 10% of stocks in the S&P 500 were above their 200-day averages. Today, that figure has improved to 50%.

Here is a look at how this measure of “breadth” — the percentage of stocks above their 200-day moving averages — has fluctuated over the past three months. The following chart shows the breadth for the S&P 500 and its individual sectors:

(data via stockcharts.com)

On the surface this is a positive development, as we like to see stock prices elevated above their longer-term moving averages. However, notice that the 50% ratio for the S&P 500 as a whole is right where stocks capped out in November coming off the October declines. What followed was a -10% market plunge in December. Will stocks lose steam again here? Tough to say.

One argument in favor of stocks continuing to rally is that the growth-oriented sectors, namely Technology, Consumer Discretionary and Industrials, look stronger today than they did in late-November. For instance, 60% of Tech stocks are above their 200-day averages, which is 20% more than there were back in late-November.

I have written about this many times before, but one of the reasons we track this kind of market breadth is because we want to see the components that make up the market rising together. When only a few sectors are rising it often is not sustainable. In addition, we want to be able to distinguish the stronger sectors from the weaker ones, which is something that this breadth measurement helps us do.

In Our Portfolios...


What's New With Us?

I cannot remember ever getting this much snow in the Seattle area. As of last night we had nearly 11 inches at our house. The bad news is that it makes it tough to get around. The good news is that we are able to work from home and conduct most of our regular business operations. Here is to hoping that the snow clears in a couple days.

Have a great week!

Brian E Betz, CFP®
Principal

Tax Deduction Rules When Claiming Retirement Plan Contributions

Hi everyone,

With tax season on deck, here is a summary of the tax deductions you can claim relating to different types of retirement account contributions:

If you want to make Traditional IRA or Roth IRA contributions for 2018, you have until April 15th to do so. Contact us if you have questions. Also, the above video is available on the FAQ page of our site, under the drop-down Taxes.

In The Market...

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

(price data via stockcharts.com)

The loss snaps the four-week winning streak stocks had been on. Six of the 10 stock sectors declined on the week. Real Estate and Technology led the way, while Energy, Consumer Staples and Health Care were each down more than -1.0%.

Stocks were resilient despite the weekly decline. Prices started the holiday shortened week lower, before rallying the rest of the way. Last week was constructive, yet there is still a ton of price resistance to contend with for the January gains to hold. So far they have, which often isn’t the case when stocks rally off of a big downward move. The best-case scenario right now is that stock prices move sideways for a couple weeks, before continuing their ascent.

Our bond positions performed well last week. We continue to own Treasury bonds and Corporate bonds in most accounts.

On the stock side, we were more active compared to prior weeks. We added a S&P 500 growth fund to many accounts, which is heavily weighted in companies in the Technology and Consumer Discretionary sectors. We also added to the cloud-computing Tech fund that most accounts already owned. The Tech sector has been leading this recent rally, specifically the Software and Semiconductor industries.

In Our Portfolios...


What's New With Us?

I painted the guest room in our house on Sunday, which was my highlight. That now makes roughly 75% of the interior of our house I have painted.

Have a great week!

Brian E Betz, CFP®
Principal

The Tax Planning Dates And Forms To Know

Hi everyone,

Your tax forms will be ready to view soon. Here are the dates when TD Ameritrade will release Form 1099s:

This week: Initial draft of your Form 1099 will be ready to view. We are happy to securely email you a copy of your 1099 when they come available. You should expect a 1099 if any of the following apply:

  • You own a taxable brokerage account

  • You made contributions into an IRA account

  • You took withdrawals from an IRA account

If you own an IRA but did not make any contributions or withdrawals, you will not have anything to report for tax purposes.

Feb. 7: A revised draft of your Form 1099 will be available. Revisions occur if there are tweaks, such as reclassifying dividends. The differences between the initial draft and revised draft are usually minimal, however I recommend waiting to file your taxes until you have the FINAL version of your 1099.

Feb. 13: A second revised version is available, if needed. Note that many 1099s will not need any revision. As such, this date and the Feb. 7th date may not apply.

You should receive notification by email when your tax forms are available to view. We are happy to email you your forms as well, so just ask. To learn more about which specific tax forms you should expect to receive, watch our brief video here:

In The Market...

The S&P 500 gained +2.9% last week. Let's look under the hood:

(price data via stockcharts.com)

 Stocks rallied for a 4th-straight week. The difference last week is that it came without much volatility. This is encouraging, no doubt. Every stock sector was positive except for Utilities, showing that investors preferred growth over safety last week. Further evidence of this was reflected in the long-term Treasury bond market, where bond values fell and rates rose.

Last week I highlighted a ton of potential price resistance that could keep stock prices from ascending. Those headwinds still exist, but a near-3% positive week was constructive toward more potential gains in the weeks ahead. It is still wise to be cautious though. It is common to see these types of rallies following a serious decline. It is rare to see prices rally in a straight line higher coming off the type of declines we saw in December, without choppiness along the way. Point being, I still expect more chop.

We added to our stock positions last week. Meanwhile, we are using stop-loss orders to try and protect against another sharp decline, should that occur. A stop-loss is an order to sell an investment if its price falls to a certain point. Our stop-loss orders have not triggered because prices have risen over the past few weeks. In response, we have raised the price of those stop-loss orders to capture recent gains.

We bought a Cloud-Computing fund (SKYY) that focuses on the software niche within the Technology sector. Some of the bigger components of this fund include Netflix, VMWare, Salesforce, Google, Cisco and Microsoft. The fund owns many of the names that are frequently showing up on our buy list. The software space looks as appetizing as any segment of the U.S. stock market right now, but of course software companies face the same macro risks that non-tech firms face.

In Our Portfolios...


What's New With Us?

A pretty typical weekend for me, consisting of soccer for my daughter, Home Depot and football. The market was closed today (MLK Day).

Have a great week!

Brian E Betz, CFP®
Principal

401k And IRA Contribution Limits Go Up For 2019

Hi everyone,

For the first time since 2013, the amount you can contribute into an IRA is increasing, from $5,500 to $6,000 ($7,000 if age 50 or older). The 401k contribution limit is increasing as well. The amount of pay you can defer into your 401k plan goes up from $18,500 to $19,000 ($25,000 if 50 or older). This chart Josh put together does a nice job detailing the 2019 contribution limits for various accounts, as well as the gift and estate tax exclusions. Take a look:

 A couple things to stress regarding IRA contributions:

  • Your ability to deduct your IRA contribution may be limited/restricted if you already contribute into a 401k plan. Check with us or your CPA before doing so.

  • The $6,000 limit covers all IRA plans you own. For instance, if you intend on making both Traditional IRA and Roth IRA contributions, you can split the $6,000 between accounts but your cumulative contribution cannot exceed $6,000. Meaning, you could not deposit $6,000 into one IRA and another $6,000 into a second IRA. But you could do $5,000 into one IRA and $1,000 into another IRA, or $3,000 into one and $3,000 into another, etc.

  • If you plan on making a Roth IRA contribution, we advise waiting until the calendar year is over to do so, rather than make recurring monthly contributions. This ensures that your income does not exceed the IRS limit that prevents you from making Roth contributions. You have until April 15th of the following year to make IRA contributions for the prior year, so there is plenty of time. You don’t want to risk funding a Roth IRA throughout the year, only to learn that your income was too high and have to scramble to get the funds out of the Roth to avoid paying a penalty.

  • The above IRA limits apply to 2019, not 2018. I emphasize this because if you plan on making IRA contributions for 2018 (which you have until April 15, 2019 to do), the contribution limit of $5,500 applies ($6,500 if age 50).

If you have questions on any of the above, just ask!

In The Market...

The S&P 500 gained +2.6% last week. Let's look under the hood:

(price data via stockcharts.com)

 A 3rd-straight weekly gain for the S&P 500, which saw every major stock sector finish in the green. Is this the beginning of a much larger rally? Maybe, but I would not bet on it for one major reason.

Looking back over the previous market “corrections” that have occurred since the start of 2018, the S&P 500 found what is called price “support” each time it fell to 2,600 (the dashed line in the chart below). This means that stock prices rebounded when the S&P fell to this price on three separate occasions. These points in time are circled in the chart below.

(chart created in stockcharts.com)

The fourth time this occurred in December (last circle on the right), the price support at 2,600 did not hold and the S&P sharply fell another -10% below it in a matter of days. Since then, S&P index stocks have methodically worked their way back up toward 2,600, finishing last week just below that mark.

Now what?

Technically speaking, we might anticipate that 2,600 will become a “resistance” level that prevents stock prices from building on this current rally. It is common for a price-point to turn from support to resistance after the support is broken. This potential outcome is plain as day when looking at the above chart.

If this alone were the only headwind that existed I may be more optimistic, but the fact that many of the other statistical measures we care about are damaged fuels the stock market risk I believe is present heading into next week.

With that being said, the picture is better than it was last week, which was better than the week before that, which was better than the week before that… So there has been improvement. However, the market does not go up or down in a straight line, so it is most likely that further declines come before the S&P 500 eventually mounts a sustainable rally.

If we are right, then patience pays. If we are wrong, we will adjust accordingly by potentially adding to our stock positions.

We added a couple bond positions last week — a Corporate Bond fund (SPLB) and a Municipal Bond fund (PZA). The Muni bond fund was only added to taxable/brokerage accounts, as the tax-exempt nature of the bond interest paid by Muni bonds is of no benefit to IRA accounts. I believe the bond market has potential over the coming weeks and could potentially provide a hedge in the event that stock prices do fall lower from here. We shall see.

In Our Portfolios...


What's New With Us?

On my commute home from the office Friday I drove along the Highway-99 Viaduct one last time before it closed down for its pending demolition. As excited as I am for the new underground tunnel and a Seattle waterfront that may rival San Francisco’s Embarcadero, I’m going to miss the Viaduct. On a clear day, the view driving along it through downtown Seattle is been tough to beat.

On that note, our office hours will be more varied over the next few weeks until the new tunnel opens. Josh and I may potentially be working from home a bit more due to the massive increase in traffic that the Seattle Dept of Transportation anticipates. I am all about efficiency and sitting in a long, unnecessary commute is inefficient. Our business hours will remain the same, as will our effort and focus, so I expect no impactful change on our day-to-day operations. But I do want to give you the head’s up.

Have a great week!

Brian E Betz, CFP®
Principal

What To Know About The RMD Laws

Hi everyone,

If you are aproaching age 70 and own a 401k or IRA, you need to know about the Required Minimum Distribution (RMD) laws, which mandate that you withdraw a certain amount each year starting at that time. Our video below explains what you need to know about the RMD rules, when they apply and how to calculate them.

The RMD rules run deep. Please ask if you have any questions, especially when it comes to the calculations. You can access this video — and others — by visiting the “FAQ” page on our site.

In The Market...

The S&P 500 gained +1.9% last week. Let's look under the hood:

(price data via stockcharts.com)

Stocks put together consecutive weekly gains for the first time since early November. It was a pretty bumpy ride getting to last week’s gains, as is often the case around year-end. We saw decent improvement, but it is tough to make too much out of it considering the market was sleepwalking through New Year’s Eve and closed altogether on New Year’s Day.

The S&P 500 experienced its first truly negative year since 2008, falling -4.5% (including dividends). Coming off of the worst December on record ever for the U.S. stock market, are better things to come in 2019?

The headwinds remain the same as they were in late-November, when stocks looked primed to mount a meaningful rally but instead fell hard in December. There is much ground to be made up, so we must be careful when it comes to trusting any of these short-term rallies. Looking at things through the broad lens of the S&P 500, the following issues persist:

  • Price of S&P 500 is below its 200-day moving average (would like to see the price be above it)

  • Slope of the 200-day moving average is falling (would like to see it rising)

  • Nearly 80% of the companies that comprise the S&P 500 are below their respective 200-day moving averages (would like this to be above 50% or better)

  • Relative Strength (RSI) remains weak, just below 50.0 (would like to see it above 60.0)

These are just a few. Ideally with time the market will stabilize, these measures will strengthen and the long-term outlook will improve as a result. The challenge is how long that may take. Right now we should remain cautious when it comes to short-term gains because we are likely to see more volatility to the downside as well.

We did not make any major portfolio changes last week. We did add to our Long-term Treasury bond fund (SPTL) across most accounts. If the stock market continues to move higher this week we may selectively add to our stock positions, but again, patience is key.

In Our Portfolios...


What's New With Us?

I spent Saturday night sick from a 24-hour stomach flu I picked up from my daughter. It was either that or the Seahawks game that did it. Rough weekend for me, but I’m back at it.

Have a great week!

Brian E Betz, CFP®
Principal

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 stockcharts.com)

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®
Principal

Thanksgiving Means Tax-Loss Harvesting

Hi everyone,

It is hard to believe that there are only six weeks left in 2018. With year-end approaching, tax-loss harvesting is something to consider if you own a taxable investment account. Essentially, any non-IRA or 401k account you own. Taxable accounts are those for which you receive a Form 1099 each year.

What is tax-loss harvesting? It is intentionally selling positions at a loss, in order to use those losses to offset other gains you had during the year. It is a very useful strategy toward reducing your tax bill.

Here is how it works from a high level… Suppose back in April that you sold a bunch of company stock that had vested for a nice gain. For simplicity let’s say that is the only investment transaction you have made so far this year. You would be taxed on that capital gain.

Meanwhile, let’s suppose you own other stocks/funds as well. Some of these investments have fallen in value since you acquired them. You can sell some of these positions and apply the resulting loss against the gain from the company stock you sold. This helps reduce or eliminate your capital gains tax burden. If you have multiple taxable accounts, the cumulative gains and losses are netted against each other for taxation purposes.

The bottom line is that if you anticipate owing significant taxes related to investments you own, or if you are holding investments at a gain, let’s talk.

In The Market...

The S&P 500 fell -1.5% last week. Let's look under the hood:

(price data via stockcharts.com)

Most sectors were in the red coming off of the prior week’s gains. I actually felt last week’s -1.5% loss was more constructive than the prior week’s +2.1% gain because after taking a big tumble to start the week, stocks stabilized as the week wore on. I still anticipate that the market will continue to be choppy, much like we saw back in February/March when it took 2-3 months before prices started to rise.

No major portfolio moves last week. We added to our dividend-heavy S&P 500 index fund. For those accounts that own individual stock we logged a gain on United Health Care and a loss on Apple.

In Our Portfolios...


Have a great week - HAPPY THANKSGIVING!

Brian E Betz, CFP®
Principal

The Benefits Of A Roth IRA Conversion

Hi everyone,

The deadline to complete a Roth IRA conversion is Dec. 31st. Our brief video below explains the benefits converting pre-tax IRA funds to a Roth IRA. Check it out:

In The Market...

The S&P 500 gained +2.5% last week. Let's look under the hood:

(price data via stockcharts.com)

Stocks rebounded last week but the overall picture has not changed, as shown in the below chart of the S&P 500. The price of the S&P index remains below its 200-day moving average (a). There was some improvement in terms of Relative Strength (b), but that momentum indicator remains weak. And lastly, entering this week only 45% of S&P stocks are above their respective 200-day moving averages. This goes without saying given that the S&P as a whole is below its 200-day moving average, but it is worth highlighting because 45% is the lowest/worst ratio in nearly 3 years.

(created in stockcharts.com)

Midterm elections are this week. If you are wondering how those may influence our investment decisions, the answer is that they don’t influence them at all. Much like the 2016 election, we put zero emphasis on election results as it relates to buying and selling stocks and bonds.

We did trim our positions even further last week, in light of recent weakness. We will continue to be patient on the stock side, while bonds continue offering nothing. In fact, we sold our high-yield bond position last week. As a result we own no bond positions at this time.

In Our Portfolios...


Have a great week!

Brian E Betz, CFP®
Principal

Unintended Outcome Of The New Tax Laws

The number of corporate stock buybacks is reaching peak levels this year.

In the first quarter, S&P 500 companies bought back $189 billion of their own stock from investors. That was the most since 2007. Take a look:

(source: Yardeni Research, Inc.)

The estimate for Q2 is close to nearly $200 billion as well, though preliminary. 2018 is poised to be a banner year when it comes to share repurchases among large corporations.

What is a stock buyback? Simply put, it is when a publicly traded company uses cash to literally buy shares of itself that are owned by investors. It results in fewer shares outstanding, which helps concentrate share ownership and subsequently boost the share price.

Is this a good thing?

It is not good or bad. It just is.

What makes all this newsworthy is how it relates to the recent tax law changes that went into effect this year. The new laws give companies the ability to repatriate, meaning bring back, profits from overseas at a reduced tax rate compared to the previous 35% charge (which was reduced to 21% in the new bill as well). The new laws will only assess a 15% tax on repatriated liquid assets like cash and 8% on non-liquid assets like equipment.

The idea behind the Trump/GOP tax plan was that the reduced tax rate would entice big corporations to bring assets back to the U.S. and invest more domestically. Historically, large companies have been reluctant to bring home foreign profits due to the hefty 35% tax charge for doing so.

What does this have to do with stock buybacks?

Presumably, much of the cash being repatriated is being used for buybacks. I hesitate to say it is being used for buybacks “rather than investing in new U.S. operations” because it is way too early to make that distinction. But the clock is ticking.

President Trump has said that “trillions” (specifically $4 trillion as recently as August) in corporate funds would be brought back to the U.S. as the result of the tax law changes. According to the Wall Street Journal, only $143 billion has been repatriated so far in 2018. Those funds come from 108 publicly traded companies that comprise the bulk of the $2.7 trillion in overseas profits, although two companies — Cisco and Gilead Sciences — comprise a whopping two-thirds of the total amount. It is premature to draw too many conclusions because giants like Apple, which has pledged to bring back a large amount of capital, have yet to do so but very well could.

The elephant in the room is answering the question: Do companies have a responsibility for prioritizing investment over share buybacks with these repatriated funds? No, they do not. Of course there is so much lobbying that is done between powerful companies and powerful politicians that the idea of “owing” anyone anything is a bad rat hole to go down. So that aside, I would argue the companies are not under any obligation to use the funds in a particular way. If they choose to buy back shares of stock, so be it.

In The Market...

The S&P 500 gained +1.1% last week. Let's look under the hood:

(price data via stockcharts.com)

 A nice bounce-back week for the overall market. The S&P is back near its recent record high, while 9 of the 10 stock sectors finished higher on the week. Corporate bonds ticked higher as well, which is good to see.

It has been a pretty quiet couple of weeks with regards to portfolio moves. I feel pretty good about most of our current positions and those that I am becoming lukewarm on are not worthy of selling just yet.

In other news, I want to share an actual article that I saw this past week, courtesy of Bloomberg:

(source: bloomberg.com)

I am not providing the entire article because I myself did not even get past the second paragraph. Some things I just shake my head at in disbelief. This being one of them.

If you believe that cryptocurrencies like Bitcoin are a fad, these are the types of developments that will be looked back at as evidence in the future. The evidence being the sheer over-engineering that is going into finding ways to invest in an ultra-volatile asset class. I would use the word “bubble” but given how much the price has plunged in 2018 that is not really applicable (though for context, the price of Bitcoin is still higher over the past full 12 months).

Look, I have no idea what the future holds for cryptocurrency, and frankly, do not really care. My skepticism largely stems from the disconnect between what Bitcoin was created to do versus how it is actually being used. It was created as a means of completing e-commerce transactions. It is more widely used - or should I say held - as an investment. In my opinion this is problematic. But time will tell.

In Our Portfolios...


What's New With Us?

 I will be out of the office on Friday this week. If you need something urgent on Sept 21st, contact Josh Baird directly.

Have a great week!

Brian E Betz, CFP®
Principal

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 stockcharts.com)

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 stockcharts.com)

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®
Principal

An Iconic Toy Company Closes Up Shop

"I don't want to grow up, I'm a Toys 'R' Us kid."

One of the first commercials I remember as a kid will soon fade into an even more distant memory. That is because Toys 'R' Us is going out of business here in the U.S.

The toy giant is reportedly closing all of its U.S. stores despite attempts to restructure its massive debt. The company decided that it can pay off more of the billions it owes by liquidating the business entirely rather than continuing its struggling operations. At least one bankruptcy hearing remains, but it looks like operations will wind down in the very near future.

Toys 'R' Us is just one of the many retail companies that will succumb to Amazon in the years ahead, which has rendered such traditional brick-and-mortar distribution obsolete. It also continues to chip away at commercial real estate, as these Toys 'R' Us warehouse-like locations will remain empty for some time.

If you have gift cards to either Toys 'R' Us or Babies 'R' Us, use them as soon as possible. In a CNN Money article I was reading, a company spokesman said gift cards would only be honored for the next 30 days. To that end, if you plan on returning something purchased at either store, do not wait. On the bright side you should expect massive discounts in the weeks ahead as Toys 'R' Us winds down its operations in the next couple months.

In The Market...

The S&P 500 fell -1.3% this past week. Let's look under the hood:

(price data via stockcharts.com)

Stocks continue to see-saw, having alternated between weekly gains and losses since early February. Investors migrated to safety last week, namely Utilities and Real Estate, which were the only stock sectors that finished in the green. The surge in these defensive sectors would suggest that more losses are coming for the broader market, but overall conditions still look pretty good despite last week's decline and general choppiness. The S&P 500 has been inching its way back toward its record high of 2,873 set in January. The index enters this week at 2,752, roughly -4.5% below that peak.

The bond market had its best week of the year, rising for just the fourth time in the past 11 weeks. Treasury Bonds, Corporate Bonds and Preferred Stock all finished positive. Our more conservative client accounts continue to hold a cash position. This cash would normally be invested in bonds but the bond market has looked weak for the past few months. If that changes and the bond market continues to strengthen then those funds will be reinvested sooner than later.

In Our Portfolios...


In Financial Planning...

The long-awaited Dept of Labor Fiduciary Rule was rejected by the Fifth Circuit Court of Appeals. I am not sure exactly what that means, but it does imply that it will be a while longer before the law goes into effect. The Fiduciary Rule requires stock brokers to begin serving as true fiduciaries to their clients, rather than meeting the current, minimum standard of recommending investments that are solely considered suitable.

This distinction of "suitability" vs. "fiduciary" can be summed up by the following analogies:

"That shirt fits you." (Suitability requirement met)
"That shirt fits you AND looks good on you." (Fiduciary requirement met)

The second analogy is the standard we are already held to by virtue of being a Registered Investment Adviser (RIA) firm. As such, this DOL Fiduciary Rule does not impact our firm like it will other brokerage firms. Nonetheless, it is important to be aware of what checks/balances are being implemented across the broader financial services industry.

What's New With Us?

The good news is I mowed our lawn for the first time this year. The bad news is the engine was steaming when I finished, so I need to figure out what is wrong and fix it. Hopefully this great weather we have had continues throughout this week.

Finally, if you need help prepping the investment-related details for your tax return, just ask. By now you should have all the materials you need or have the instructions that I sent to obtain your Scottrade tax information from TD Ameritrade.

Have a great week,

Brian E Betz, CFP®
Principal

The Biggest Mistake You Can Make

Top Of Mind...

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

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

How you put money to work.

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

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

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

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

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

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

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

In The Market...

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

(price data via stockcharts.com)

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

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

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

In Our Portfolios...


In Financial Planning...

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

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

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

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

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

What's New With Us?

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

Have a great weekend,

Brian E Betz, CFP®
Principal

Stock Market Momentum Hits A 60-Year High. What's Next?

Top Of Mind...

Among our investment philosophies there are a few that I specifically mention here from time to time. One of those is the belief that stock market rallies are bullish, meaning that gains lead to more gains.

That may sound obvious, but I know for a fact it isn't to most people. I know this because of how often I hear people say they think the market is about to fall. Or, by the amount of attention an article attracts if it involves predicting that the market will crash. The problem is, most doomsday articles are ripe with bold claims about why the market is going to plunge but void of meaningful analysis to explain why. These predictions usually involve the phrase "because we are due for a crash". Perhaps it is because we have an innate feeling that what-goes-up-must-come-down, especially for those who invested in 2002 and 2008. Those memories remain fresh.

I most recently turned bullish on the stock market in the summer of 2016. The market had just finished a pretty volatile 18-month stretch where it essentially went nowhere. It appeared to me then -- based on my analysis -- that the market was primed to rally. So I was not surprised when it did, even amidst the turmoil of the 2016 presidential election and the uncertainty that a lot of people had about the future direction of the stock market.

Today, however, I am starting to feel surprised.

U.S. stocks just wrapped up another winning week. The S&P 500 has now risen in 17 of the past 21 weeks dating back to this past August. A staggering feat. Excluding dividends, the S&P is up roughly +14% in that time. As surprising as that might be, the more surprising thing is how stretched one of the key statistical indicators is that helps guide our analysis: Relative Strength.

The Relative Strength Index, or RSI, is a statistic we use to measure market momentum. We look at it in tandem with the price of any investment we buy or sell. For instance, if the price of the Technology sector fund (XLK) is rising and the RSI reading for the Tech sector fund is also rising, that would imply momentum is strong and the price will continue rising. Flip that around and the same would be true if both the price and RSI were falling. We would presume that the price will fall further.

Right now Relative Strength is officially off the charts. RSI typically floats between a value of 30.0 and 70.0. The higher the reading the better, but if it gets too high it often indicates that the stock market is overheated. Most investors view 70.0 as that threshold. Right now the RSI for the S&P 500 index is at a staggering 87.0. Not only is it above the upper threshold but it is the highest RSI reading for the U.S. stock market since 1959!

Take a look at how the S&P 500 has risen over the past 14 months to get to where we are today:

(chart created via stockcharts.com)

The RSI reading is the smaller chart plotted above the S&P 500 price chart. Notice in the upper-right corner just how far RSI is extended (3). This chart does not show it, but you would have to go back to the Eisenhower administration to see Relative Strength of this magnitude.

Ironically, I tend to view RSI readings above 70.0 as bullish. I cannot really say why, other than through my years of experience seeing investments continue to rise for a substantial period of time after their RSI levels had reached 70.0. Normally I would say this too is bullish, but this is uncharted water given that market momentum has stretched itself to a 60-year high. Truth be told, I expected some sort of pullback by now, even if it was a quick -5% blip that freaked people out before investors swooped in to buy at discounted prices.

Does this mean you should sell stocks? No. But it has made us more judicious about how we are allocating new money. We are very sector-oriented right now, meaning we are prone to buy funds tied to specific sectors we believe are strong (e.g. Tech, Industrials, Health Care) rather than buy the S&P 500 index fund as a whole.

There is one other way RSI helps inform our investment decisions -- when RSI starts to diverge, or break away, from the price. For instance, if the value of the S&P 500 is rising but its RSI is flattening or falling, we might interpret that the market is losing steam and could fall soon. An ominous turning point, if you will. The opposite is true too. If the price has been falling for some time and RSI has bottomed and is now rising, it could mean that a rally is near.

This type of RSI divergence is crucial, as it was here back in the summer of 2011:

(chart created via stockcharts.com)

Notice how RSI (2) started falling, yet the price of the S&P index (1) stayed mostly flat. Eventually the S&P took a -15% dive in the matter of a few weeks (3). This is a great example of how RSI proved to be a very good leading indicator. Market momentum faded and eventually stock prices succumbed to that dwindling demand.

I really like the above chart because it illustrates what a more "normal" market correction looks like. Most investors only think about 2008 and the -40% decline that occurred during the subprime mortgage crisis. But if you look at the 100-year history of the stock market you will see that -40% drops are not normal. What is more normal are -10% drops or -15% drops, such as what occurred in 2011.

As scientific as we try to make our investment process, the way we use RSI and stock price together is as much an art as it is a science. Most often it helps confirm that we should continue holding an investment more than it tells us when to sell, since the stock market has a bias to go up in the long run.

I am happy to answer any questions you might have. I hope you found this informative and not too technical.

In The Market...

The S&P 500 gained +1.7% this past week. Let's look at how the individual sectors performed:

(price data via stockcharts.com)

Growth stocks like Industrials and Consumer Discretionary continued to be strong out of the gates in 2018. Dividend-paying areas of the market like Utilities or quality bonds were down again. The rabid thirst for growth stocks has come at the expense of investors selling the more conservative areas of the market, like REITs, Utilities and Treasury bonds.

That tide might be about to swing though, if only for a short time. Most client accounts own Utilities. I have been displeased with the recent losses within that sector. However, I do think Utilities will rebound soon. Whether that means we sell and pivot to different sector remains to be seen.

In Our Portfolios...


Q&A/Financial Planning...

A few housekeeping items pertaining to tax documents, review meetings and Scottrade.

Tax Forms -- TD Ameritrade will make tax forms available on the following dates:

  • Form 1099 (Brokerage Accounts): This contains capital gains/losses as well as dividend income for taxable accounts. This form will be available sometime between Jan. 19th and Feb. 14th.
  • Form 1099-R (IRA Accounts): This shows what IRA withdrawals you made, if any. This form will be available on Jan. 22nd.

You can access the forms by logging into your TD Ameritrade account. I can also email them to you as well. As I mentioned last week, there are likely to be corrections to the 1099 Brokerage form. Please wait to file your taxes until you have received the final version. Corrections are typically made to the dividends figures reported.

Also, most of you will receive a 1099 from Scottrade as well, for the time we held accounts there prior to migrating to TD Ameritrade. Sorry that you will have to navigate two different tax forms, but the good news is that there will only be one tax form for 2018 come next Spring.

Video conferencing -- Whether for formal reviews or one-off conversations, we are using video conferencing more and more. It is efficient given the ability to screen-share and it eliminates the time associated with commuting to/from our office. We are certainly still able to meet face-to-face, but just want to highlight this as an alternative since it might be more conducive to your schedule.

Scottrade -- Some of you still receive random notices from Scottrade from time to time. With the exception of tax information, ignore any notices you receive.

What's New With Us?

My wife and I went to see "The Book of Morman" at the Paramount Theater this weekend. I also spent a few hours trying to get our water/ice dispenser working on our refrigerator, but was unsuccessful. The buttons on the panel all work, but no water or ice dispenses when the lever is pressed. I welcome any tips you have if you have tackled this type of thing before.

Have a great week,

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Brian E Betz, CFP®
Principal