Answering Your Questions About the Next Recession, AI Investing, and the Federal Deficit
With the presidential election less than a week away, I know many folks are feeling like the present is on pause while we’re waiting on some important answers about the future.
Matt Wilson, Keen Wealth’s Chief Investment Officer and President, reviewed the latest data surrounding the election, the health of the economy, and the early outlook for 2025 in his recent 2024 Q4 Market Update Webinar. Today we’re going to discuss some follow-up questions from webinar attendees that should provide a little more clarity about the relationship between your short-term and long-term financial planning.
1. "When do 'the algorithms' predict the next correction, and what are the defensive moves to take now?"
While AI analysis and computer simulations are becoming a bigger part of economic analysis, Matt and the rest of the team at Keen Wealth still focus most of their attention on some traditional data points.
One is the “yield curve”, which charts the interest rates that the U.S. government pays on treasury bills, notes, and bonds. These instruments mature for lengths ranging from less than one year all the way up to 10, 20, and 30 years. Typically, longer maturities earn more interest. But right now, the yield curve is inverted, meaning that short-term rates are higher than longer-term rates. In part, this is because over the past several years, the Federal Reserve raised the short-term interest rate.
An inverted yield curve can be a red light for a recession, and some models are predicting the economy will slow significantly in the fall of 2025. Of course, many of these same models all but guaranteed a recession last spring. Matt was skeptical of that prediction, and despite all the ups and downs we've experienced in the past year, a recession never materialized.
As for "defensive moves" investors should be considering a diversified portfolio that's part of a comprehensive financial plan, which is usually capable of weathering market corrections, including recessions. From Keen Wealth's perspective, that means not just having equity investments but also building up 3-5 years’ worth of retirement income needs in brokerage and retirement accounts as well.
2. "Is Keen Wealth using AI in any capacity on the investment side of the portfolio?"
Frankly, it's hard to imagine many scenarios where an investor isn't exposed to AI in some capacity, no matter what your portfolio looks like or who's managing it.
Publicly traded companies are required to release earnings reports and discuss them via conference calls with their shareholders and the general public. Based on data that Keen Wealth has reviewed, more than 40% of the 500 companies on the S&P 500 discussed AI in recent earnings calls. In other words, AI is now a big part of how the biggest companies in the world operate and how they generate profit for themselves and their investors.
A typical financial advisory office is probably using AI in some of the same ways that any other company is: data entry, scheduling, drafting memos and marketing campaigns, speeding up routine office tasks so that employees can spend more time on creative work or helping customers face-to-face.
But letting an AI platform make investment decisions is a heavily scrutinized topic by regulators in our industry. Anyone who's played with ChatGPT has probably experienced "AI hallucinations," where the chatbot comes up with an answer that just doesn't make any sense. At this stage in the technology's development, there's just too much risk that AI might hallucinate a “financial plan” that empties someone's retirement savings.
3. "What impact does the U.S. national debt have on our economy and the rest of the world?"
This question usually takes on some added significance during election years as presidential candidates discuss their plans on the campaign trail. And, according to the nonpartisan Committee for a Responsible Federal Budget, former President Trump and Vice-President Harris do have something in common: their plans would both add trillions to the federal deficit.
Of course, we know that our next president won't have carte blanche to fulfill every campaign promise or enact every item on their agenda. Some ideas might materialize, increase consumer spending, and stimulate the economy. Others might drive up government spending and spark more inflation, although probably not at the levels we've seen in the past couple years.
However our debt fluctuates, the long-term outlook for our economy remains strong. So far, there's no data suggesting that U.S. federal debt affects the markets. And, as we've discussed in the past, there just isn't a viable alternative to the U.S. dollar as the world's reserve currency, in no small part because of the health of our economy and its central role in global trade and investing.
Hopefully our conversation today calmed a few nerves and reminded you not to let an AI model or an election play an outsized role in your financial planning. Scheduling a year-end financial review with Keen Wealth could help to clear up any other questions you have and set you up for a successful year ahead.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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