Financial Market Updates - October 2025

In this episode of The Dental Boardroom Podcast, host Wes Read, CPA and financial advisor at PracticeCFO, talks with Brandon Hobson (Chief Investment Officer) and Paul Lipcius (investment committee member) about what’s happening in the markets and why it matters for dentists.

They break down the recent Federal Reserve rate cut, explain how bond yields signal what might happen next in the economy, and discuss what the steepening yield curve could mean for growth and inflation. The team also looks at today’s stock market, where high valuations and a heavy focus on just a few big tech companies may bring new risks.

Plus, they explore why international stocks are starting to outperform and how adding global exposure could strengthen your portfolio.

Whether you’re saving for retirement or planning your practice’s financial future, this episode gives you practical insights to help guide smart, long-term investment decisions.

Key topics include:

• What the Fed’s latest rate cut means for bond yields and future inflation
  
• Why the yield curve’s steepening could signal improving economic conditions
  
• The risks of sky-high U.S. stock valuations and concentrated index exposure
  
• How international and emerging markets are reshaping the global investment landscape
  
• Long-term investing principles every dentist should follow

Transcript

[00:00:00] Wes Read: Welcome everybody to another episode of the Dental Boardroom podcast. As you listeners know, once a quarter, I like to do an investment market update. What are we seeing in the stock market? What are we seeing in the bond market? What's happening with the Federal Reserve and just what's happening in our economy?

[00:00:18] Wes Read: And, uh, it relates to all of us listening. It does filter down into our own personal bank accounts one way or another. And so I like to, to do this with two of my colleagues. We have our Chief investment Officer, Brandon Hobson, on the line. Hey Brandon. Hey Wes. Thanks for having me. And then we've got Paul Sci also on our investment committee, one of our key team members around our investment selection and asset allocation choices.

[00:00:45] Wes Read: Highly involved with some of our clients' largest. Sort of investment clients. So he eats, drinks, breathes, and sleeps around the stock market just like Brandon. So these two guys I will openly confess are more informed than I am on following the stock market and reading the Wall Street Journal. So thanks for being here, Paul.

[00:01:04] Wes Read: Thanks for having me. Alright, the three things we're gonna talk about in this episode are, number one, what's happening with the bottom market and the fed. Interest rates, yield curves, yada, yada. And I wanna emphasize to our listeners, to our dentists, that there's something a lot of people don't know, and you may not know, but the bond markets are a, they're like a, they're like a, a leading indicator in some ways of where the economy is going.

[00:01:31] Wes Read: They tell certain stories that's different than the stock market, in other words. And so I want, uh, you, Brandon, and Paul to help extrapolate what is the story that the bond market is telling us right now. Secondly, we'll go over the stock market that has its own story. I think it's a different story in terms of kind of what are the, the messages it tries to tell us versus the bond market.

[00:01:54] Wes Read: And then lastly, within the stock market, I wanna look at international stocks. This is the year of international stocks, and I want to talk about why. And then ultimately sort of stick the landing by talking about what we're doing as a firm, uh, with our clients' assets. Our clients entrust us to make certain fiduciary decisions and oversight of their 4 0 1 Ks, their IRAs, their defined benefit plans.

[00:02:21] Wes Read: And we take that responsibility intensely, um, and very sacredly. And so we're grateful for our clients for putting that trust, and we want them to know that we have a very deliberate. Intentional way of allocating out their investments and making these choices. All right, let's jump into the Fed interest rates in the bond market.

[00:02:42] Wes Read: The recently, the Fed cut the rate by 25 basis points. This is about a week or so ago, and the current rate is at four to 4.25%. Brandon, what does this mean? Why, and do you think there's gonna be more rate cuts down the road? 

[00:03:03] Brandon: Yeah, good question, Wes. I think, I think the current rate being at four to four point a quarter percent, um, puts the, the, the feds still at kind of a moderate restrictive stance here.

[00:03:15] Brandon: And so I think the neutral rate is, nobody really knows what that rate is, but I think it's somewhere around 3%, maybe three and a quarter. Um, and so I, I believe there's probably gonna be another rate cut this year. And that, that might come in the next meeting. Um, the market is pricing in two more rate cuts this year.

[00:03:35] Brandon: Uh, but I think, I think a lot of people are thinking more, more like one rate cut is the better expectation here. There's just a lot of unknown with the unemployment rate right now. Um, both the denominator and the numerator are moving in the unemployment rate. So you've got the job, the, the actual active recruiting for jobs going down.

[00:03:57] Brandon: And you also have the, um, the working population decreasing due to immigration stance and stuff like that of the, uh, of the executive branch. And so I think, I think there's a lot of unknown there. There's also some unknown on the inflation side, so that's why I think one more rate cut is the more likely scenario there.

[00:04:16] Wes Read: Well, one thing for certain, we know our president is pushing aggressively for rate cuts. Paul, let's pivot this over to you. Um, what does a rate cut mean for, for dentists? 

[00:04:32] Paul Lipcius: Well, I think the most immediate impact we all feel. Um, us as consumers and our clients is really just overnight savings rates, so you know, what yield you're getting on savings when you're parking in a bank.

[00:04:47] Paul Lipcius: The, you, you brought up a good point, which I wanna remind our listeners, is the bond market tells us a lot as a leading indicator, and I think it's helpful to just kind of remind people of, of why is the rest of the yield curve is what we call it, that relationship between. Time and the rate you receive on your funds or in the case of a borrower, it's the reverse, the amount you're paying that's really moved by the market dynamics.

[00:05:13] Paul Lipcius: So buyers and seller of bonds, um, in the open marketplace. Um, and that's typically what the day-to-day individual or business owner feels. So the movements in the 10 year treasury are what are gonna. Is what's gonna move, for example, a 30 year mortgage more than the overnight rate, or that's what's gonna move a practice loan or an equipment loan more than the overnight rate.

[00:05:40] Paul Lipcius: So I bring that up. Um, and, and really want to lay this up for a segue, is that there's been a steepening. So despite overnight rates coming down, and so maybe we're getting a quarter percent less on our savings, there's actually been a, a bit of a steepening in the longer end of the curve. And so I think.

[00:05:59] Paul Lipcius: Our clients are not really going to feel much of the impacts of the Fed decision on that front, but I do think if you were gonna go get a practice loan today versus even a quarter, uh, you know, 90 days ago, that might be a bit higher. Um, Brandon, curious to see your thoughts on this. I mean, that steepening is generally a good economic, um, indicator.

[00:06:27] Paul Lipcius: Um, that, that the longer term outlook is, you know, more bullish and therefore investors demand a higher return. That being said, I mean, where do you see the 10 year moving? Or do you have an opinion? 

[00:06:41] Brandon: Yeah, I, I do. I, I think that the 10 year is gonna continue to move higher from here. I think that overall, what, when people think the fed cuts rates, generally speaking, they think that that.

[00:06:52] Brandon: Affects all interest rates along the entire curve like you were alluding to Paul. Um, that's not the case. You know, sometimes the longer end of the curve can move higher, even while the feds cuts the shorter end of the curve. And so I think some of the things that are gonna push the, the longer end of the curve higher is.

[00:07:10] Brandon: Like you talked about, Paul, the strong, um, backdrop of the economy, GS actually coming in strong and that that tends to lead to higher, longer term interest rates. Also, there's, um, some, some inflation concerns that could lead to longer or, or higher long term interest rates. Um, and so, so I do think you could see the, the 10 year continue to push to 4.5%, maybe even above that.

[00:07:36] Paul Lipcius: That's the dichotomy of the 10 year, right. On one hand, you could have it signal, economic strength, and on the other you can have it signal, uh, a, a higher fear of inflation. And so it is tough to sort of parse out what's, what's positive and what's negative of that movement. 

[00:07:52] Wes Read: And just to be clear, for our listeners, a 10 year, let's say treasury bond, a 10 year bond.

[00:07:59] Wes Read: Uh, is gonna be very different than a one year bond. The one year treasury bond is gonna match something more like maybe your savings accounts at the bank that are getting some interest or some short term CDs. When the fed lowers their rate, those things like the savings account or these one year bonds or CDs, those interest rates are typically gonna come down.

[00:08:17] Wes Read: So you, as an, an investor putting your money in the savings account or buying these CDs, you're gonna see less of a return on those in the short run, but the 10 year bond. Is is different. It, it's telling a different story about our forecast of the future. So the one year is more immediate, very tight to what the Fed is doing.

[00:08:39] Wes Read: But the 10 year, not so much so, and at the 10 year rate, if I go to buy a new 10 year bond and the rate on that bond is now giving me more, let's say it goes up to, I'm gonna use exaggerated numbers here, here, but let's say it goes from four to 5% during a year period. What is that telling us about consumer?

[00:08:57] Wes Read: Uh, forecasts on the market when the rate of a new tread, 10 year treasury bond goes up. 

[00:09:06] Paul Lipcius: Well, it's telling us a, a million different things. Brandon talked about inflation. It can also be a signal of economic strength. Um, it can also just be supply and demand dynamics. You know, if, if the treasury's borrowing, um, you know, kind of piling into the deficit.

[00:09:24] Paul Lipcius: Well, you're gonna see an imbalance in supply and demand, and so I think any immediate movement, it's tough to get an exact read, but over time the, the story generally shows itself forward. Now, in my opinion. I'm curious to hear what you guys think. I think it's an entirely mixed bag, because there are concerns about more well concerns and uncertainty.

[00:09:48] Paul Lipcius: I would caveat. About the longer term inflation run rate, particularly with tariffs and some of these other new developments. Newer developments not new at this point. Um, but economic data, particularly on consumer sentiment is not exactly rip roaring. I mean, consumer sentiment is, um, uh, flirting with, with lows on the year.

[00:10:07] Paul Lipcius: I think it's back to where the reading that just came out from the, uh, university of Michigan study was something like back where it was in in March or or April. And so we are getting a mixed bag of. Of reviews, um, or, or rather readings on what that 10 year movement is telling us? 

[00:10:27] Brandon: Yeah. I think from an inflation standpoint, the, the one thing that's interesting is that, um, services inflation is actually three times that of goods inflation.

[00:10:37] Brandon: And so if you were expecting. Which by the way, overall inflation is at 2.7% right now. The PCE is 2.7% that came out last week. That's the federal reserve's desired metric or the the primary metric they look to and. Of that 2.7, only 0.9% of that was related to goods inflation, the rest related to services inflation, and so there for as far as tariffs go on, the inflation impact at, at least at this point, it's looking like that impact has been relatively muted.

[00:11:10] Brandon: There are some that, that, that don't think the tariffs have filtered through the economy yet. So if you even assign a 50% probability that the tariffs have flowed through the economy, so there's another 50% yet to come, it's, it's still hard to see tariffs at this point having a, a, a material impact on inflation.

[00:11:29] Paul Lipcius: Couple a couple. Go ahead, Paul. To my understanding, a lot of the tariffs haven't been, um, implemented yet. Is that, is that correct? Like, um. Some are going into effect today, if I'm not mistaken. 

[00:11:44] Brandon: Today's, uh, healthcare, those were just announced, I believe last week. But for the most part, the tariffs have, have been implemented.

[00:11:51] Brandon: And, and, and that's why I'm saying even if you assign a 50% probability of that not being so maybe 50% more to come, it's, it's still hard to see that that actual goods inflation is being impacted by tariffs at all. As of today, 

[00:12:07] Paul Lipcius: no doubt. And I think any of it, any of the drivers, at least as we're seeing it in the bond market, are maybe more centered around what's to come.

[00:12:15] Paul Lipcius: 'cause even when they go into effect, you don't, you don't know. And I think it's more of a reading on uncertainty than the actual economic I impact. Right. 

[00:12:22] Wes Read: Yeah, I, I got it. I got a thought on this one. I think. International trade contracts, you can't just flip a switch and turn it on. There's a lot of nuances.

[00:12:32] Wes Read: There's exceptions, there's gotta be agreement. There's all that stuff, and then you gotta execute it, which means you gotta get the ability to collect on those tariffs. Now you've gotta set up sort of the, the, the, the workflow or the process of, of collecting on those tariffs, registering it in the government books, all that stuff.

[00:12:49] Wes Read: It doesn't just happen overnight. My personal opinion on this is that the jury's still out on what the effect is going to be. Obviously, there's an inevitable effect because somebody's paying money. The question is who is paying that money and is it, is it a hundred percent US companies, are they absorbing some of it?

[00:13:07] Wes Read: We talked about this in our last episode as well. I think that's where the uncertainty is a little bit. The other thing that I think is a lot of the, um. A lot of the big companies are sort of committing to reroute manufacturing in the state, in the state, in the, in the states. But I think there's a lot of empty promises at this point.

[00:13:27] Wes Read: For example, at the tech dinner that Donald Trump had with all of those tech leaders a few weeks back, um, he went around the room and he said, how much are you reshoring by investing here stateside in factories and whatnot? And Zuck Zuckerberg was on his, on his right hand, the the chosen one, and he said.

[00:13:46] Wes Read: 700 billion, but then it was caught in, in, in a hot mic Afterward, he was talking to Donald Trump and he says, I didn't know what the number you wanted, so I just said 700 billion. And that I think is indicative of a little bit what's happening right now, which is people making commitments in order to avoid pressure or avoid sort of, um, the administration coming after them because they are clearly showing that they're coming after anybody and everybody, nobody's exempt.

[00:14:13] Wes Read: Not even Rupert, Rupert Murdoch over Fox, which is clearly more favorable to. The, the, the Republican side. Donald Trump will come after anybody right now, and he's, even the government is even taking ownership in some of these companies as well. And there's more conversation about that. But all that to say is that I think that what everyone is trying to figure out is what is the reality of these tariffs gonna be.

[00:14:37] Wes Read: How much onshoring of manufacturing is actually going to occur versus how much is just stated. Because the onshore manufacturing doesn't happen in three months, six months, sometimes even during the term of a Segal presidency. It takes a long time to build out the infrastructure to truly onshore manufacturing, and then.

[00:14:58] Wes Read: What happens to the pricing, the pricing on whatever goods or services are being delivered through that rerouting of the supply chain. That's why I think the market just hasn't known yet. Mm-hmm. What it's gonna be. 

[00:15:12] Brandon: Yeah. Yeah. I mean, I, I would say yes and no on that. I, I think that even if you do do some onshoring and that takes some time, uh, that you would expect to see tariffs start to show up in inflation.

[00:15:25] Brandon: While we have the intermediate time of, of not onshoring not bringing jobs to the US and, and you would expect it to be larger really, because if you think Onshoring is gonna bring down inflation, you would expect the impact on current day inflation to be higher. That's just not showing up in the numbers.

[00:15:42] Brandon: So, I mean, there is a lot of unknown yet to come, but. The numbers aren't showing that tariffs have had a material impact on it, on goods inflation up to this point. And 

[00:15:52] Wes Read: I, I think one thing that validates that comment, Brandon, is the fact that this year, how much have we collected in tariffs so far? 

[00:15:59] Brandon: I'm not sure of the exact number, but there it's a lot.

[00:16:02] Brandon: It's, it's a significant. Amount higher than what it was in previous years. 

[00:16:06] Wes Read: I, I think so far we're at somewhere around 200, 250 billion, which is a healthy amount. And if you annualize that, it's probably gonna be somewhere around 400 billion or so. So we're clearly collecting a lot of tariffs. So I said these things take time to sort of roll out the process.

[00:16:22] Wes Read: That said, it's already happening and we're already, the government's already collecting a lot in tariffs, and yet we're not seeing a huge spike in inflation, which sort of substantiates what you're saying, which is we don't know yet. But so far nothing is indicating that there's gonna be this sort of direct correlation between tariffs and inflation.

[00:16:42] Wes Read: It may be indirect and it may be softer, but I think we all agree that the end result is TBD at this point. Yeah. Uh. 

[00:16:49] Paul Lipcius: And, uh, I'll tell you where I, I believe we're getting a pretty clear bond. Market reading is on the corporate side. Um, sa same general principle that the market sets the borrowing rates for longer, dated, um, longer dated bonds.

[00:17:06] Paul Lipcius: But the way we read the risk, um, risk profile of just the general business dynamics for public companies is on what's called the risk premium or risk spread. So if. You know, ExxonMobil's borrowing for 10 years versus the US Treasury borrowing for 10 years. What's the difference in those rates? We'll tell you the risk premium and, and right now that, that is razor thin.

[00:17:29] Paul Lipcius: Yeah. If you ask me, it's, it's, it's too thin. It's a, it's a, it's a very bullish indicator that at least, at least this shouldn't impact Corporate America. May, maybe, maybe there's some o overarching, um, uh, uncertainties around how it impacts a consumer. And inflation the like, that, that's what really the treasury market's telling us, but we're not seeing, seeing a corresponding increase in those risk premiums.

[00:17:54] Paul Lipcius: And so, um, I think that paired with just general stock market performance valuation is saying, Hey. At least the signal is that, hey, corporate America is doing just fine. 

[00:18:05] Wes Read: So if I understand you right there, you're saying if the corporate interest rate, if I get a corporate bond and it's not giving me a whole lot more in return than a treasury, that means the corporation is very low risk because a treasury is pretty much as low risk as you can get.

[00:18:20] Wes Read: At least it historically has been that way. Sure. And so that risk premium goes down by saying, we believe corporate America is doing really, really well. So we don't demand as much of a, an interest rate because the risk isn't as high there. Brandon, did you want to add to 

[00:18:33] Brandon: that? Yeah, that, and that's exactly right.

[00:18:36] Brandon: So the risk premium on investment grade corporate bonds right now is, is about three quarters of a percent over the treasury bond. And so you want that to be above 1%, typically 1.5%. It would, would indicate a healthy premium over over a treasury. Um, so the fact that those yields are, are. Actually going in the opposite direction.

[00:18:58] Brandon: It's a, it's interesting. It could be, uh, a sign of, um, that, that the, that the, uh, market's placing very little premium or risk premium on that. It could also just be that they're overbought right now and a lot of, a lot of buying has been happening in the corporate space, and that could adjust over the next couple of months, but it's definitely something to keep an eye on.

[00:19:18] Brandon: Another thing is that high yield bonds are yielding below 3%. Um, on that, on that, uh, premium as well. And so they're, they're typically above 3% is when you expect to buy high yield bonds and make some money on those. But when those yields get so compressed, the bonds become less attractive. 

[00:19:36] Wes Read: Alright, let me ask you about this.

[00:19:38] Wes Read: The yield curve oftentimes is a leading indicator to what our outlook is on the future of the economy. And like you both said, there's a lot of factors that go into why the 10 year bond moves, rate moves up and down. But one of them is just a general outlook on the economy. What happens to the 10 year and even the 30 year if we feel like we're gonna go into a deep recession or something even uglier?

[00:20:05] Wes Read: What happens to those longer term curves? Well, 

[00:20:09] Paul Lipcius: the r remember, the, the economy is not the stock market, and so. What we've historically seen with the yield curve, is it actually, so, so I just want to call that out because some, it, it's, sometimes people kind of combine those two into one, meaning that 

[00:20:27] Wes Read: if the s and p 500 

[00:20:28] Paul Lipcius: is doing well, we think the economy is doing well.

[00:20:31] Paul Lipcius: Yeah. And that's not always the case in the short term. In the long term, those tend to move more in lockstep. And so it's, it's not uncommon for the yield curve to start signaling a more bullish economic backdrop before the. Inevitable sell off in stocks is coming. So I want to just caveat that, but I think a ge uh, a general steepening of the yield curve is bullish for the economic backdrop.

[00:20:54] Paul Lipcius: Um, it, it means that look over time, the fed, so right now we're focused on what the Fed's doing in a more restricted policy, lowering rates. But the 10 year is telling us that ain't gonna last forever because we, you know, we're bidding up or bidding down, um, through pricing, but bidding up the interest rate that we wanna get on longer term yields so that that's a more bullish indicator that over time the Fed will not be able to continue cutting.

[00:21:20] Paul Lipcius: In fact, they might be raising in the future. It's sort of this discounting mechanism of what may or may not happen in the future. Um, well, 

[00:21:27] Wes Read: and the way that I look at 

[00:21:28] Paul Lipcius: it. It, uh, go ahead and finish Paul, and then I'll shut that. Lemme finish that, that comment that it's very common actually for that economic signal to happen before the, the, any movement in the, in the stock market, the general stock market occurs.

[00:21:42] Paul Lipcius: So I don't, it's, it's a bullish longer term economic signal. It may or may not be a, a bullish stock market signal. Got 

[00:21:52] Wes Read: it. Yeah. When I think of the long-term curve, I think of that concept of flight to quality. If people are worried about where the economy is going right, then they will move their assets to something that feels safer, and treasuries tend to be viewed as a much safer asset, obviously.

[00:22:08] Wes Read: And so if you have a lot of of demand going into these 10 year or 30 year bonds, that's because people are concerned about the market. Crashing. And if there's more demand for those bonds, the interest rate's gonna go down because they don't need to have as high of interest rates to attract the borrowers.

[00:22:27] Wes Read: And so if the yield curve isn't as steep or in a terrible situation, it gets inverted. Is that not an indicator that people are concerned about where the economy is going when the long-term yields are falling? 

[00:22:42] Paul Lipcius: No, it, it does. And that, that's kind of where we were for quite, quite some time with an inverted curve.

[00:22:49] Paul Lipcius: Um, but now we are seeing that steepening, so, so it actually is the reverse. More money is flowing into stocks, valuations are getting pushed up, and some of that's coming out of the, the longer end of the curve, at least in, in the last, you know, 90 days or so. 

[00:23:05] Wes Read: Speaking of where the economy's going, gold, gold is up 45% this year.

[00:23:11] Wes Read: It's at 3,890 per ounce. I think that's a record. Don't quote me on that, but that's, no, I will quote you. It is way up there. What story is that telling us guys? 

[00:23:26] Brandon: It's hard to tell. It's definitely a flight to safety trade. Um, another thing that could be affecting longer term rates and definitely stock market valuations in the near term, is that as the Fed does cut rates on the shorter end.

[00:23:40] Brandon: Um, these money market funds are gonna pay less, and so you're gonna, you should see some big money flows out of these very short term liquid money market funds, and that's gonna go into things like gold bonds if people are, um, taking the flight to safety approach, and if they're bullish, you'll, you'll even see some of that flow into stocks.

[00:23:59] Wes Read: Got it. Okay. Let me wrap up this section on the Fed interest rates and the bond market base case right now, meaning the most likely scenario is. All indicators are pointing. They're not pointing to a recession anytime on the near horizon. However, there could be more easing, meaning lowering of interest rates in October if jobs soften further.

[00:24:22] Wes Read: Any final comment on the bond market and the Fed? All right, let's move into then number, uh, number two here, the US stock market. So several metrics are flashing warning signs that the s and p 500 may be overvalued factors such as ai, hype, projected earnings growth, and lower interest rates appear already priced in to stock, uh, stock prices, reducing forward return potential, and increasing correction risks.

[00:24:53] Wes Read: So here's my question for you. What key metrics are suggesting that broad indices in the stock market are overvalued? 

[00:25:03] Brandon: I can go first on that one. I would say if I picked one key metric to focus on, it would be the trailing PE ratio. Um, and the reason for that is because it's, it tells, it tells a lot. Uh, and so the s and p five hundreds trailing PE right now is over 30.

[00:25:20] Brandon: For context, uh, the PE on the s and p 500 has only exceeded 30 for, uh, extended periods of time during the 90 98 and 2000 two.com crash. Right? And so it, it's definitely high. It's, it's elevated and if you dig under the hood. Um, a lot of the mega cap stocks are carrying that PE high. So in other words, there are a lot of stocks in the s and p 500 that are trading at a 15 to 20 multiple that are good.

[00:25:48] Brandon: Which is, which is a healthy, 

[00:25:49] Wes Read: longer term multiple. Right? 

[00:25:51] Brandon: Exactly. Exactly. And so that's considered a healthy multiple and an attractive. An attractive investment. Um, but you gotta, si you gotta sift through that a little bit in order to, to uncover what's really value and what's o overhyped right now, or maybe overvalued.

[00:26:07] Brandon: Um, and so that would be my key metric that at least the, the most important one that I'm keeping an eye on there. Wes 

[00:26:13] Paul Lipcius: Got it. Paul. Yeah. And that PE ratio, I, what helps me and I think is a simple way to look at it, is the inverse is an earnings yield. It's the exact same calculation. Flipped over. So if, uh, you have a 25 price to earnings ratio, that means you get $1 of earnings.

[00:26:31] Paul Lipcius: Uh, uh, you buy stock for 25 bucks a share, and you get $1 of earnings, that's a 25 multiplier, which is like a 

[00:26:39] Wes Read: three point a half, 4% rate of 

[00:26:41] Paul Lipcius: return. Well, I just, yeah, no, it's a four. It's an exactly 4% rate of return. Right? Because it's the inverse of, um, instead of 25. One divided by it. It's instead of 25 times one is one divided by 25.

[00:26:54] Paul Lipcius: Yeah. So the point, the point is what we like to look at, not as an end all, be all metric, but let's compare that to the risk-free rate. So I can go lend the US government something, uh, or some money over a 10 year period and be getting a mid 4% yield. But when I do that with the SP 500, trading above 30.

[00:27:14] Paul Lipcius: I'm only getting a, you know, a, a three-ish percent yield that the math gets a little more complicated. But the point is that that yield is so low compared to a risk-free rate that it's signaling a huge earnings increase over time. Basically, the market's saying, look, these companies are gonna grow their earnings at a pace that treasury just can't keep up with.

[00:27:34] Paul Lipcius: And so that puts a lot of pressure on forward earnings. I think, I think you said that correctly in the, in the, in the beginning. Um, that, you know, when, when those. Multiple, when those multiples expand to this degree, um, we're pricing in a lot of growth and, you know, a hiccup or two can, can really move, move stocks in a material way.

[00:27:55] Paul Lipcius: So I think that's, you know, the PE ratio, like Brandon said, that's the number one thing, um, you should be looking at. And, and that sort of inverse and how that compares to other opportunities is a really good way to sort of ground that thought process or dialogues and, and I think is at the premise for.

[00:28:13] Paul Lipcius: You know, investment manager decisions like, like a Warren Buffet and Berkshire being so heavy in tre in treasuries and short term bonds is that that spread, um, you have to be really nuanced to find the deals, um, because it's just not in the index right now. The index is so overrepresented with these high pe, high expectation names, um, that you can't, you, you know, you can't just throw a, a random dart at a dartboard and find, find good value.

[00:28:43] Paul Lipcius: So 

[00:28:43] Wes Read: what does this mean for your average investor who is maybe going index, throwing money in the s and p 500 as kind of their, their primary anchoring fund in their accounts? This is very, very common, right? The SP 500 index is just, it's, it's, uh, it's something everyone sort of refers to, but the s and p 500 index, its composition has changed so much over the past 10 or 15 years with those.

[00:29:10] Wes Read: Magnificent Seven or even heard Magnificent 10 with a few additional ones being added in there and they're just outsized. Their effect is so disproportionately outsized. The rest of them it becomes less diversified in some ways by market share. How is this, um, how is this kind of dynamic of the s and p 500 composition?

[00:29:34] Wes Read: Uh, changing Brandon as our investment chief investment officer, our approach a little bit when we do use a lot of index based options in our client's portfolios. 

[00:29:47] Brandon: Yeah, it's a, it's a really good question, a really good point that you make to, on the s and p 500 not being very diversified right now, I think the top 10 stocks make up nearly 40% of that index.

[00:29:59] Brandon: And so as an investment, um. Manager on the investment management side of the business, we don't wanna necessarily follow a, an s and p index like that. Um, that has the largest 10 stocks of the index making up 40% of the returns. So what we've done is we've focused more on factors that drive our ETF or index indexing approach.

[00:30:22] Brandon: And factors are, would be things like, uh, dividend paying stocks. That's a factor. Value is a factor. And by buying into ETFs that have these factors as opposed to just a pure index ETF, you're able to reduce some of that risk that you would be getting if you're just buying into the s and p. Also, you can do, um, you can go by cap size, right?

[00:30:43] Brandon: So you could do value small cap value, large cap, fundamental large cap ETF, things like that will, will help you balance that risk reward a little bit better. 

[00:30:54] Wes Read: Yeah. Paul, any thoughts on that? 

[00:30:57] Brandon: Uh, 

[00:30:58] Paul Lipcius: I have plenty of thoughts on that. Yeah, I, I, I do think the index is in incredibly frothy. Um, if, if, if you wanna, if you wanna follow it blindly, get ready for some volatility, I think it's just priced in such a manner where you have to expect that you have to expect some mean reversion on this.

[00:31:16] Paul Lipcius: Um, with that being said. Plenty of Underloved industries out there. Um, you know, earlier in the year we saw a really broadening of performance and we've kind of gone back to the growth story of, you know, semiconductors and tech carrying the load of the, over the past, uh, quarter or so. Um, but I think there, there still is in staples and utilities, energy production, those sorts of, um, spaces a lot of good opportunities, um, for, for the investment public.

[00:31:44] Paul Lipcius: So taking a look under the hood. Still a lot of good deals. Um, you just really can't focus exclusively on the index in, in a market like this. 

[00:31:56] Wes Read: Yeah. Um. When the indicators are pointing to overvaluation like gravity, eventually it's gonna come down. If they're truly overvalued. And if we are using history as a measuring stick, then we will cycle back to something more to the mean.

[00:32:17] Wes Read: The question isn't, when it isn't, will it happen? It's, it's when will it happen? And that's what's the most difficult aspect of investing and it's why most so many people lose. A lot of money is because they're anticipating something correctly. Their timing is just off. And so they may pull their money outta the market, go to cash, or go to short-term treasuries or CDs because they think the market is gonna fall, or they go to gold, they think the market's gonna fall, and then the market just keeps going on for another 2, 3, 4 years at a 10 to 12% rate of return.

[00:32:49] Wes Read: And then they're thinking, oh, well I'm missing the boat. And so they put it back in only to find out within six months the market does actually crash. So that psychological aspect, that behavioral aspect of investing is the biggest culprit as to why people underperform the markets over time. Part of our job as CFO advisors here is to help our clients stay disciplined.

[00:33:09] Wes Read: Through the cycles and to remember that dollar cost averaging is real. When you're putting money in your 401k or your IRA or brokerage accounts, every, every month, every year, every paycheck, you're just putting in little by little. And so if the market's falling, you're buying the the stock at a lower price incrementally as it's falling.

[00:33:28] Wes Read: So when it does then recover or arrive at a higher price, you will have bought low and then you could sell high later. And so it's that systemization. That is a very predictable forecast of what your investments will do over time if you remove the emotions out and you are just, you're just almost robotic about it.

[00:33:49] Wes Read: This is an area of life where returns are better when you're just robotic about it. And that's a, that's a key thing here at Practice CFO that we do. And we always start by preparing an investment policy statement for our clients. And then we hold pretty firmly to that investment policy statement that targets a given risk over time, not necessarily in the short run.

[00:34:13] Wes Read: Well, one of the areas of opportunities that's doing really well right now is international stocks. Why Brandon? Are international stocks just crushing it this year. 

[00:34:23] Brandon: Yeah, so international stocks have. Pretty much outperformed or, or doubled the return of, of even the s and p 500? Right now, I believe it's somewhere around double, so I think emerging markets are over 25% and international developed markets are up about 23%.

[00:34:39] Brandon: Um, the, some of the factors driving that are the weakening dollar. Uh, has, has really helped buoy international markets. Also, valuations are more attractive. So we're talking about the US market being, you know, kind of showing signs of being red hot or overvalued. There is a lot more, um, fundamental, attractive, attractive stocks on the fundamental and value factors, put it that way in the international markets.

[00:35:06] Brandon: Um, also global growth is recovered not only in the US but also in in these other countries as well. And so when international markets start to outperform the US market, like what's happening this year, that tends to happen in cycles. It's usually just not one year or six months. This can go on for, you know, an eight year period or, or, or more.

[00:35:29] Brandon: And so that's, that's really what I'm looking at here, is to see if this is a period of a rotation into international markets that could be sustained for the next five to 10 years. And if so, um, we want to keep at least 20 to 40% of our clients' portfolios exposed to international, developed and emerging markets.

[00:35:47] Wes Read: Agreed. You know, one thing we always have to have conversations with our clients about is that we, we are diversified for a reason. And when the mag. Seven are, are outperforming dramatically the rest of the, the market on average. A lot of our clients know about Apple, they know about Nvidia, they know about Google, they know about Tesla, and they're investing money in this, or they hear about their friends are doing it, and here we are in this much more.

[00:36:18] Wes Read: Diversified portfolio, which is gonna underperform in those years, which have been very consistent in the past number of years that those top stocks are outperforming. However, like Paul said earlier, forward earnings is, there's a ton of pressure on these companies. To monetize, what is their current stock price?

[00:36:37] Wes Read: Incredible pressures, and are we, is it even possible for them to deliver the value that would be required in order to produce that return to those investors? Over time? Jury's out. I mean, ai, it's just, it's hard to tell with ai. Um, this, uh, bill Gates said that when it comes to technology, we tend to overestimate what it will do within a two year period, and we tend to underestimate what it will do in a 10 year period.

[00:37:04] Wes Read: And we're sort of coming up on, I don't know, year two or so of ai have we sifted through. All of the, the, the fog of AI to understand what is it truly intrinsically creating by way of efficiency and gains within businesses. I think, and I heard a research, uh, study on this, that so far businesses are spending more money and resources trying to figure out how to adopt AI systematically than the gains that they're getting.

[00:37:31] Wes Read: And so the real net value out of AI has not emerged yet. So the jury's out though, 'cause no doubt it will. It's just the jury's out. What's the timeline on that ROI of AI and what is the ROI going to be? Because the forward earnings on these big companies, all those companies I mentioned are all very heavily invested and dependent on AI at this point for their future earnings.

[00:37:54] Wes Read: And so that's, that's just what, what we don't know. And I just wonder if there's not like a lot of money moving into gold. Uh, very strange statistic is that the, the amount of hamburger helper being purchased right now is going through the roof, which is this sort of unusual leading indicator that people are suddenly getting concerned and really frugal at the same time.

[00:38:15] Wes Read: I just. I just wonder, are we going to be able to sustain? What is this expectation and forecast that's in the stock market? And if not, what is that gonna. Gonna meet. But I will say for practice CFO, we've always been diversified, which means we've always had international, we've always had a broader exposure to the s and p beyond those top seven that consume 40% of the of the returns.

[00:38:37] Wes Read: And we've always had value stocks, and none of those are value stocks. Correct me if I'm wrong, Brandon, but those are all growth stocks. But in the long run, in the long run, value stocks outperform growth because value stocks are more directly tethered to the intrinsic current value. Of earnings that they're dishing out.

[00:38:56] Wes Read: And so it's a lot more predictable even though it's less sort of popular and sexy, so to speak, as as an investment options. Alright guys, any final comments on the stock market, the bond market and what we're doing as a firm to help our clients manage their assets? 

[00:39:13] Paul Lipcius: Now, I think the. Message is consistent.

[00:39:16] Paul Lipcius: It's, you know, stay measured and resolute. Um, and I, I just, I, I was explaining this to a client the other day and I thought it might be good to share here is, you know, a, any impact, and you, you alluded to this, Wes, but a any, um, any returns you get today, you, you're sort of borrowing from tomorrow, right? So if you were thinking, Hey, uh, you know, my portfolio's gonna gimme 10% annually over the next X years, and we're up 20%.

[00:39:42] Paul Lipcius: Well, guess what? 10%, uh, annualized return is now being trimmed down to eight or nine. So anytime we have these big rallies, you know, it, it, it's very, um, human nature. It, it, it's very consistent with human nature to, to be more optimistic when, um, I think those are the times where you kind of sit back and, and wanna be more measured and say, okay, how am I playing defense?

[00:40:07] Paul Lipcius: What is my bond allocation? What are my reserves? Am I following the trends or am I following the underlying backstop of the American economy? And so those are things we do behind the scenes, but I think it's helpful for folks to just remind themselves, don't get caught up in the fervor. I I do think the valuation train, um, will come to the station who, who knows when?

[00:40:27] Paul Lipcius: I certainly don't. Um, but yeah, that's, uh, the forward returns have certainly been borrowed from, I believe, Brandon, final comments. 

[00:40:38] Brandon: Yeah, I think, I think just keeping in mind that there is value under the hood. It's just a little bit, um, convoluted by some of these mega, mega tech stocks. Um. Yeah. And, and just being confident in that, that the long-term value or long-term investing approach does, does make sense even when valuations get a little stretched, right?

[00:40:58] Brandon: Um, so, so stay focused on the long-term goals. Stay invested, right? Don't move to cash. Don't, don't take your money out of the market. Um, and just try to find those pockets of, of opportunity where they exist. All set 

[00:41:11] Wes Read: discipline. Everybody discipline matters here. And in the long run, just staying disciplined and not having these emotional reactions with our dollar is a, is a, is probably the most powerful ingredient of long-term returns, is just that discipline right there.

[00:41:33] Wes Read: And of course, we do a lot of tactical things for our clients. We're rebalancing. So shaving off what's done really well and buying what hasn't done as well, and therefore removing the emotions out of the process of buy low, sell high. We also do tax location. This is something I mentioned in a recent podcast.

[00:41:53] Wes Read: Tax tax location can earn an advisor's fee alone if you're placing the right securities, the right investments in the right accounts. And a tax free versus a tax deferred versus a taxable are very different in their time horizon and the tax nature on those different accounts. And, uh, it's, the research has shown that somewhere around half, uh, a percent to 1% can over annually, over time, can be acquired by just real good.

[00:42:22] Wes Read: Location of your investments across your accounts. We here have a software, it's called Tamarack, that gives us tools to systematically do this across all of our clients as well. So focus on the things that you control. This is what I want our listeners to really, really walk away with, is there are things that you don't control and there are things that you do control.

[00:42:41] Wes Read: And the best thing that you can do to maximize the opportunity of return for your future on the on your invested dollar is to focus on what you can control. Keep investing. Live under your means so that you have a surplus every month to put into your accounts, automate your savings accounts, review your, yeah, review your investments periodically, but avoid any wholesale movements.

[00:43:03] Wes Read: Meet with your financial advisor to, uh, hear a, an external voice, a professional on these matters, and keep investing when the market falls. That should be the time where you're saying, this is the time I wanna put more money in. If I could increase it more, great. Now, it depends on what your dental practice is doing and how hard it's hit by any economic downturn, but to the extent you can keep funding that, the better, particularly around these 4 0 1 ks and defined benefit plans where you're rerouting money that would be going to the IRS and you're putting it in your future.

[00:43:37] Wes Read: Pocket your future self's pocket. That is such a key ingredient to compounded long-term growth. I can't emphasize that enough. And therefore, your consumption to income ratio matters. How much you're consuming relative to your income matters. And if you can get that consumption to income ratio down, that leaves more money to set aside for your future self.

[00:43:57] Wes Read: And final words here at Practice CFO. With all of our clients. Each client is two clients. It's the client today and it's the client in the future. And both matter to us. We care about both and we invest for both. And we, um, we ultimately are trying to drive their assets to produce a good life. Alright guys, thanks for joining on this episode.[00:44:18] Wes Read: We'll do another one in three quarters, see what's happening with the market at this point. Until then, have a great one.