Overpriced Stocks Due For A Big Drop Or A "Lost Decade" | Chance Finucane

**Chance Finucane** (0:00)
To get back to sort of what we consider to be more of a fair value level, you'd have to see the S&P 500 fall back towards 5,000 compared to it being at 6,000 today.

**Adam Taggart** (0:17)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. Stock market valuations remain high by nearly every valuation metric. And what concerns today's guest is that the earnings estimates being used to price stocks today seem far above what the free cash flows of the underlying companies will be able to deliver. In short, stock prices appear to be promising returns that their actual profit growth simply can't meet. We'll discuss this concerning disconnect today with Chance Finucane, Chief Investment Officer at Oxbow Advisors. We'll also address the other big trends factoring into his portfolio allocation decisions right now. Oxbow Advisors is a financial advisory firm founded by Ted Oakley that specializes in the needs of high net worth clients. As Ted's CIO, Chance will share with us what kind of market outlook the firm sees ahead for the rest of the year and how it's positioning its clients' assets today for it. Chance, thanks so much for joining us today.

**Chance Finucane** (1:13)
Hey, Adam. It's great to be back. Thank you.

**Adam Taggart** (1:16)
Pleasure to have you on here. We have Ted on from time to time and we need to have you on more. So I appreciate you taking time out of your busy schedule of both managing all the portfolios there at Oxbow, but also running around after a 14-month-old young boy. Congratulations on that again.

**Chance Finucane** (1:33)
Yeah, thanks. It's been some really fun years so far.

**Adam Taggart** (1:36)
All right. We look way too rested for a guy with all that on his plate, but I'm glad for it. So look, I got a lot of questions for you.
A lot of them are based off one of your recent market updates that you published there at Oxbow. I know you also are working on one that's going to come out soon after this one. When that one comes out, Chance, you guys have been kind enough to let me share that with the Thoughtful Money audience. So folks will do that again when the latest report comes out. But anyways, a lot of questions to dig into with you here, Chance, especially on valuations. Very quickly though, if we can just kick things off with the intentionally broad question I like to start these discussions with. What's your current assessment of the global economy and financial markets?

**Chance Finucane** (2:16)
Sure. So just looking at things from the very sort of base level, we always start with sort of just what's the risk-free rate? What can we make with taking out anything on the risk curve? So right now, you're still looking at a higher than 4% short-term treasury rate. It's way better than what you could have gotten for 7 or 10 years ago, and allows you to maintain your purchasing power in a world that is 3% inflation right now. So it's nice to know you've got that as a starting point. And then when you start thinking about where you can try to take risk in a smart way, if you look at the US stock market, we just had two really good years for US stocks. And what we're seeing is that valuations are high, and if you take a 5 or 10 year outlook like we like to, the starting point that you're at today would suggest that your expected returns are going to be definitely lower than the historic average, and you need to be mindful of that.
We also think it's not taking into account the increased uncertainty and volatility that's being put into place under the new presidential administration, just in terms of not knowing where policies are going. And where you can see that is with, since the election results in November, you had this big pop over the course of a couple of weeks, where you saw small caps go up by 10 percent, you saw home builders peaking, you saw transport stocks doing well. That's all reversed now in the last few months, and is really starting to go the other direction. And I think that shows that under the surface, there's more uncertainties beginning to be priced in. But in terms of the total index level, it's still holding up. So for us, we're really trying to focus on smartly taking risk. And then the last piece is internationally, what we notice both domestically, but also overseas, is inflation accelerating, and a little bit of better growth than what we saw last year in some of these overseas markets, like in the UK, Europe, China. And just an improved rate of change and growth and inflation is a positive for commodities. And for our high-income strategy, that's been an area we've been sure to have a 25 to 30% allocation in companies that have exposure to different commodity markets. And we think that's an important place to be in the year ahead as well.