Dog Days of Summer

The Dog Days of Summer

As we grind through these late, hot, humid summer months, the markets seem to sleepily climb ever higher. Fall is historically a trying time for markets, and though there doesn’t seem to be much to worry about, I fear asset prices may have gotten a bit ahead of themselves.

Strong, Scattered Thunderstorms

In recent weeks, Central Illinois meteorologists have routinely called for a chance of thunderstorms – some strong and possibly severe. While I’m no weatherman, the hot, humid August afternoons seem to brew up some of the nastiest weather all year. From what I know, heat and moisture are the key ingredients for a storm, and the more you have of each, the higher the potential for severe weather.  Furthermore, when cool air mixes with hot, especially during seasonal changes, it can generate damaging winds and even funnel clouds.

When valuations rise in the financial markets, the likelihood of a storm increases. Valuations are a measure of market price relative to justified price.  Financial analysts use fundamental and relative pricing methods to formulate a “justified valuation,” often based on intrinsic qualities like cash flow or price multiples. They serve as a “temperature” measure, telling analysts whether asset prices are getting too hot.

Recently, several reliable market valuation multiples reached an extreme level not seen since 1999. As is the case with air temperatures and humidity, this does not guarantee any market event occurring, but it certainly increases the likelihood of a storm, and a severe one at that. As we proceed into a historically tumultuous season for the stock market, I believe it’s best to be ready for volatility. Much like the weather, financial assets have a strong tendency toward mean reversion. It’s best to keep in mind that we are far, far above average equity market returns on a multi-year basis. 

Our clients shouldn't worry about the chance of stormy weather. Proper diversification, quality portfolio management, and diligent planning all help to shelter from market volatility. Experienced investors know that sticking to a plan and remaining invested in tested investment strategies is the surest way to meet your long-term goals.

AI is Happening

I know, I’m using it.  Recently, I implemented an artificial intelligence service called Zocks into our technology stack.  Zocks acts as an AI assistant, drafting and summarizing notes, assisting with meeting preparation, and even drafting follow-up emails.  It does these tasks with incredible accuracy.  And while many of the asset managers we entrust with our clients’ wealth have already implemented AI in their securities analysis and portfolio management, I plan to implement it in our portfolio design process very soon.  The aim is to create a much more efficient and high-quality service for our clients. 

Just as I’ve written in the past, AI is reshaping the financial industry. Other industries like healthcare, telecommunications, and even manufacturing are all rapidly integrating AI to scale operations, reduce errors, and cut costs. It’s a remarkable time to be alive, and I have no doubt we’ll witness big societal changes as a result of this new technology. 

"It's Gotta be a CFP®"

The CERTIFIED FINANCIAL PLANNER® certification, issued by the CFP® Board in the U.S., has been around for decades but has recently gained notoriety as the “gold standard” certification for financial planners. While not usually considered the highest achievement attainable by financial professionals (many believe the CFA Charter holds much higher esteem), CFP® certification ensures a baseline level of qualification above a securities or insurance license. Certified planners must be college educated, pass through an extensive educational curriculum, pass a challenging comprehensive exam, and abide by strict ethical standards. I welcome this, as the financial industry is long overdue for a simplified, uniform standard recognized by consumers. 

To learn more about the CFP® certification, go to www.cfp.net.