Scott Kahan: Returning to Normal for an AI Driven Future

Scott Kahan: Returning to Normal for an AI Driven Future: Scott Kahan, Certified Financial Planner ™ professional and President of Financial Asset Management Corp. in Chappaqua and NYC, discusses the normalization of the economy as we leave the zero-interest rate era behind and how artificial intelligence is going to change everything

What are we waiting for now? Recession? Inflation? Rate cuts? Rate increases?

It’s hard to keep track with all the investment noise from the “so-called” experts. The truth is if you’re waiting to see what happens, you’re stuck. And can’t possibly make good decisions. Better to think about what is happening in the economy and within your portfolio and keep managing against your financial plan. The allocation strategy you established after considering your future financial needs, your risk tolerance and your time horizons. As markets change your portfolio will reflect the investment environment and will tell you the moves you have to make to return to stasis – which is traditionally considered 60-40 stocks vs. bonds.

So, let’s discuss what is happening…

What we are seeing is the normalization of the economy. The day-to-day drama of the stock market, inflation expectations and speculation about Federal Reserve rate cuts are all playing out in an otherwise healthy economy that is returning to normal after 20 years of zero-percent interest rates. That period is the abnormality in our rear-view mirror that is not likely to happen again, anytime soon. While current mortgage rates in the 7 to 7 1/2 % range are high – historically they are no higher than the pre-Covid 3% rates are low. And we’re just a few rate cuts away from their historical average which is the 5 to 6 percent range.

Speaking of rate cuts, what’s up with those? 

Again, the speculation is all over the place. We started the year expecting six cuts. Then conventional wisdom reduced that to two or three. Now, we hear there is at least one of the regional bank chiefs is talking about a rate hike. But the economy saw a softening in Q1 to 1.4 percent growth and the Fed has indicated it is done raising rates. At the same time, the consumer is in good shape. People are spending money. Jobs are being created. Wages are rising. With no clear signs of recession on the immediate horizon we may be looking at the soft landing everyone has been hoping for.

 I am expecting two cuts this year. One way or another, the rate environment is heading down. And all it will take is one point down over the next twelve months to return us to historical average territory. With mortgage rates in the 5-to-6-point range. The ten-year treasury around 3.5 and money market rates in the 3/5-to-4-point range.

What’s your longer-term outlook? 

The S&P 500 recently set a new intra-day high, making some people euphoric and causing others concern. And while corrections of ten or even twenty percent can always happen and sooner or later, we will have a recession too, I believe we are at the beginning of a new era. Artificial intelligence will drive markets for the next ten or twenty years the way the personal computer did in the 1970s.

Does that mean load up on AI stocks?

 

We see with NVIDIA, which promptly dropped 13% after briefly becoming the largest cap stock in the world, the problem with chasing high flying objects. Chip makers may be the short-term play, but the long-term play is corporate America. AI is a game changer when it comes to productivity and profitability, And its impact will be felt throughout the corporate sector.

So, I think the lesson of this current highly concentrated market run that makes everyone feel like they’re missing out is to stay the course. If your financial needs to buy that house, pay for college or fund your retirement haven’t changed then your portfolio allocations needn’t either. Maintain your 60–40 discipline and try to keep your emotions out of investing when corrections come. The long term is looking better now than it has in some time.

Financial Asset Management Corporation has provided fee-only financial planning and investment management services for individuals and small businesses in the Tri-State area since 1986. They serve 175 clients and manage over 325 million dollars in assets. (26 South Greeley Avenue, Chappaqua, NY, (914) 238-8900; www.famcorporation.com )

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