This is Brad Barrie, Chief Investment Officer and portfolio manager with dynamic wealth group. Welcome to this market and economic update. In this video, we’ll explore what recent market gains mean for investors who are focused on the long term picture. While the stock market has reached high levels compared to historical averages, it’s important to maintain a balanced investment approach and stick to your financial plan.

The economy continues to show positive signs. Companies are making good profits, and the economy is growing steadily. Low unemployment and the Federal Reserve’s decision to lower interest rates are also providing support.

Let’s examine what this means for investors.

Comparing the Current Market to Historical Averages

First, this chart compares current stock market valuations to last year’s levels and shows how they compare to normal ranges since 2003. The data indicates that stocks are now more expensive than they’ve been through most of the past 20 years.

The rise in stock prices after the presidential election has pushed major market measures higher, with Bitcoin exceeding $80,000 and stock valuations reaching levels not seen since the technology boom of the 1990s.

While prices can swing up and down in the short term, as we saw after the 2016 election, the price you pay for investments matters. Stock prices may move away from company earnings temporarily, but eventually, these two factors need to align.

The Relationship Between Market Valuations and Long-Term Returns

The recent market gains partly reflect investor optimism about potential policy changes following the election. However, while short term price movements show what investors are thinking, long term investment results depend on actual company performance.

Markets often overreact to both good and bad news. History shows that when stock prices are high compared to earnings like they are now, future returns tend to be lower and sometimes negative, even when the economy grows.

This scatter plot compares stock market valuations to the returns investors earned over the next one and 10 years. Over long periods, the investment strategy of buying stocks when they are less expensive typically leads to better returns. In the short term, prices can move dramatically, regardless of valuations. While we cannot predict exactly when the markets will rise or fall, valuations will help us understand likely returns over longer periods.

This is why it’s crucial to how market valuations impart long-term returns as you focus on your goals and consider how expensive stocks are when deciding how to invest. Spreading investments across different types of assets, not just stocks or bonds, as well as incorporating different approaches and disciplines, remains the best way to manage risk while working toward long-term returns.

The Importance of Diversification in a Balanced Investment Strategy

Finally, this chart shows yearly returns for different kinds of investments. It demonstrates why diversification is important, since we cannot know in advance which investments will perform best in any given year.

Currently, US stocks are performing well and other investments like international stocks, are also showing positive results, though not as strong. While stock market prices are quite high compared to historical levels, the economy remains healthy, with growing company profits, solid economic growth and supportive Federal Reserve policies.

Remember that long term economic trends, not short-term market movements, determine investment success over time. This reinforces why maintaining a balanced, diversified investment approach is so important.

We hope you found these high-level insights helpful as you consider how market valuations impact long-term returns. If you are a financial advisor and would like more information on our multi-dimensional approach towards asset management, feel free to download our eye-opening white paper titled Busting Seven Risk and Return Myths. You can click the link below or visit our website at www.DynamicWG.com or email us at info@DynamicWG.com. If you are an individual investor, we are happy to address any questions you may have and put you in touch with a qualified advisor, if so desired.

Until next time, take care everyone and make smart, logical, and fact-based financial decisions you.

Disclaimer:

• Clearnomics and Dynamic Wealth Group, LLC are not affiliated entities.  No part of this should be taken as investment advice.  Consult your financial advisor for specific investment recommendations tailored to your specific situation. 
• Dynamic Wealth Group (“Dynamic”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Dynamic by the SEC, nor does it indicate that Dynamic has attained a particular level of skill or ability. This material prepared by Dynamic is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Opinions expressed by Dynamic are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Dynamic, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.
• Dynamic does not provide tax or legal advice, and nothing contained in these materials should be taken as tax or legal advice.
• Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. Past performance is no guarantee of future results. Actual returns may be lower.