Where do we go from here? Equity valuations continue to be overvalued by almost every credible valuation measure. PE ratios are above long term averages and Schiller’s CAPE measure, though not at an all-time high, looks stretched. Don’t count on these as timing indicators as they could remain this way for a long time. The CAPE is primarily an indicator to forecast implied long term annual returns with a higher ratio implying lower returns. Stock prices reflect a value from discounting the expected value of future cash flows, earnings or dividends. High PE ratios reflect some combination of low discount rates or higher expected earnings growth, but the discount rate is only a portion of what makes up the expected equity risk premium and earnings need revenues. Real growth and inflation are very much a part of the historical returns that have occurred in equity markets. Inflation may be the part of the puzzle worth watching. The sweet spot for equity valuation is when inflation is between 1% and 4%. Either side of this range will be a cause of concern as the world’s most powerful bankers continue to push for more inflation as a way to bring normalcy back to the world economies. The market ride seems smooth for now, but ride is going to get a lot rougher. Putting your faith in central bankers may be helpful, but if an inflation scare doesn’t worry markets then the demographics of the developed world economies should.
Technology still remains the factor closely correlated to advisor success. Never more important for our industry than now. Technology touches, or should, almost every aspect of the client experience. The need for the human element will not go away, but wasting human resources on those tasks that can be done efficiently by technological processes or tools will soon seem out of date. I hope you are investing your capital in tools which increase the capacity of your business for more productivity and better client engagement, that is exactly our goal at Salt Creek. How competitive you remain will hinge on how willing you are to embrace new ways of doing business. We are and will continue to see lower costs and lower margins in the finance industry. Lack of competition is not the reason.