Topic: Portfolio Management

In January, we wrote about the impending debt ceiling and the Congressional showdown that was likely to occur. The current debt limit of $31.4 trillion was surpassed early in the year, and at that point, the U.S. government was not able to issue any new debt. It has been relying on emergency funds to meet short-term obligations. According to Congressional budget forecasts, emergency funding could run out as early as June.

The debt ceiling is the maximum amount the federal government can borrow to finance obligations that lawmakers and presidents have already approved. Increasing the debt ceiling does not authorize new spending commitments; rather, it allows the government to meet its existing obligations. 

Congress established the debt ceiling more than 100 years ago, and it has been modified more than 100 times since World War II. Its purpose was to make it easier for the federal government to borrow money, but it has become a political battleground that makes its way into the news every few years. Each time the ceiling comes up for debate in Congress, lawmakers wrestle over the ability to restrict the growth of borrowing.

If the government were no longer able to borrow, it would not have enough money to pay its bills in full, including interest on the national debt. It would probably have to delay payments or default on some of its commitments, potentially affecting Social Security payments and federal worker salaries, for example. Thankfully, this has never happened, so no one knows exactly how the Treasury would handle the situation. 

When Congress is divided, as it is today, a standoff can occur — and the creditworthiness of the U.S. government is at stake. These showdowns are not new; they have occurred under the control of both political parties and have always been resolved before the government had to default. The closest we have come to default was in 2011, when Standard & Poor’s downgraded the U.S. credit rating. In 2013, negotiations led to a 16-day government shutdown, and in 2018, we saw a shutdown of three days, followed later by a 35-day shutdown.

Debt Ceiling Showdowns Occur Regardless of Who Controls the White House

Over time, these showdowns did not tend to have a significant long-term impact. Even if the debt ceiling creates volatility in the market, now is not the time to take impulsive action. Well-managed companies adjust to shifting conditions, and the best companies ultimately learn to thrive, even in times of crisis. Markets have survived a great variety of disruptions in the past. The chart below shows different debt-ceiling showdowns. Over the long run, the market has trended up, despite the short-term volatility caused by debt disruption.

Markets Have Powered Through Debt-Ceiling Standoffs in the Past

The markets have historically been resilient. Even if this crisis is new, market volatility is not. Investors who stay the course have historically benefited over the long term. The chart below goes back only to 2009, but it is very telling. See how many events could have been a cause to panic or sell. Clearly, COVID accounts for the largest drop in the chart, but you will be hard-pressed to find the 2011 and 2013 debt crises. Those 15% to 20% drops in the market are barely noticeable. 

More importantly, as the chart above shows, the trend is up and to the right for those who stay invested. Over time, the market tends to go up, despite a multitude of reasons to sell. Over the next many weeks, we will hear a lot of noise about the impending debt showdown. If the U.S. misses a payment in June, it can and will cause a short-term shock to the markets. 

This is not a time to panic, but a time to potentially put additional monies to work in the market — if cash is available and part of the overall financial plan. Hindsight has shown that these are buying opportunities — but of course, past performance is not a guarantee for future success.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Capital Group, S&P, Ritzholtz

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Lately, it seems everywhere you turn there is talk of ChatGPT. (We even asked ChatGPT to help us write this article! ☺︎)

What is ChatGPT?

If you go directly to the source and ask ChatGPT what it is, you’ll get the following answer:

“I am an AI language model trained by OpenAI. I am a computer program designed to process and generate human-like text. I do not have my own thoughts or feelings, but I can analyze and understand written and spoken language, and I can use that understanding to respond to questions and prompts. I can also generate original texts based on a given prompt. I am trained on a large dataset of human-generated text and can use that knowledge to answer any questions and engage in conversations on a wide range of topics.”

Clear as mud, right?

As opposed to Siri or Alexa, these neural networks are trained on huge quantities of information from the internet of deep learning. (GPT stands for generative pre-trained transformer.)

The model behind ChatGPT was trained on all sorts of web content including websites, books, social media, news articles and more. It has been trained to provide answers to questions based on feelings, to auto-detect words and to provide outputs based on the inputs given to the users. The models have also been trained to chat with humans, continuously reinforcing learning from the feedback it receives from humans. Over time, it shifts its pattern and its responses based on the inputs and feedback.

How can you use ChatGPT?

Access ChatGPT by going to chat.openai.com or by downloading the app. If it is your first time, you will need to set up a free account with OpenAI and register with your email address and phone number. There is no limit to how much you can use ChatGPT in a day. Recently, OpenAI added a premium service, costing $20 per month, for heavy users to limit downtime and gain priority access to new features with faster response times.

Using the ChatGPT chatbot is fairly simple; all you need to do is type in your text and receive the information. The key is to be creative and see how ChatGPT responds to different prompts. If you don’t get the intended result, try rewording your question or give ChatGPT further instructions.

How are others using ChatGPT?

ChatGPT won’t answer every possible question, as it does have safeguards in place to “build a safe and beneficial artificial general intelligence.” In addition to answering simple questions, the model has many functions. It can compose essays, describe art in great detail, have philosophical conversations and even write code. Some of the most common uses of the tool include:

• Generating ideas and brainstorming. This can be helpful with your next blog post, new recipes or party ideas.
• Finding personalized recommendations. ChatGPT can act as your shopping assistant or offer you movie recommendations tailored to your likes or dislikes.
• Understanding complicated topics. ChatGPT can give you a succinct, clear overview in layman’s terms.
• Employing a writing assistant. It can provide customized content that you can use in a variety of situations.
• Translating a language. As of now, ChatGPT can translate text into 95 different languages.
• Getting assistance with travel plans. It can help with everything from finding flights and accommodations to suggesting popular destinations, attractions and restaurants.
• Advancing your career. ChatGPT can help you with job searches, interview preparation and even career advice.

What are the disadvantages?

Despite its advanced capabilities, ChatGPT is not without its limitations. Among its top limitations are:

• Lack of common sense. While it can generate human-like responses, ChatGPT does not possess human-level common sense and lacks background knowledge that we may have. This means that it can provide nonsensical or inaccurate responses to certain questions or situations.
• Lack of emotional intelligence. It does not possess true emotional intelligence. ChatGPT cannot detect emotional cues or respond appropriately to complex situations.
• Limitations in understanding context. ChatGPT doesn’t get sarcasm or humor, and it can struggle to grasp subtle forms of communication.
• Limitations of handling multiple tasks at once. As of now, ChatGPT performs best when given a single task or objective.
• Limited knowledge. Although ChatGPT has access to a vast amount of information, it is not able to access all of the knowledge that humans have.
• Computational costs and power. ChatGPT is highly complex and sophisticated. It requires substantial resources to operate efficiently, which means it can be expensive.

What’s the future of ChatGPT?

The obsession with AI is not slowing down anytime soon. It will be fascinating to watch how ChatGPT continues to be integrated into other applications and uses. ChatGPT has the potential to be transformative not only in the personal space but also the business landscape. The ability to automate routine tasks, provide data analysis, support multiple languages and improve data accuracy could change the way resources are allocated – i.e., more jobs for computers and fewer jobs for humans.

The future impact will depend on how quickly and effectively businesses adopt the technology and integrate it into their companies. Ultimately, ChatGPT and AI are not going away, so we will need to learn how to use them effectively — and quickly.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: CNBC, DigitalTrends, Forbes, Investopedia

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

As we move into the second quarter of the year, we want to provide a recap of the first quarter and our thoughts on what we see for the months ahead. As is typical with the markets, the first three months of 2023 were anything but dull:

• After raising rates last year by 425 basis points (4.25%), the Federal Reserve raised rates again by 25 basis points in both February and March.
• The money supply, measured by M2, went negative, and quantitative tightening basically went unnoticed. 
• The yield curve remains inverted. (Remember, every recession has been preceded by an inverted yield curve, but not every inverted yield curve leads to a recession.)
• Gold prices are near all-time highs.
• Egg prices soared to historic levels.
• The war in Ukraine entered its second year with no apparent end in sight. 
• Capping it all off, significant bank failures in both the U.S. and Europe triggered a short sell-off and revived worries of the 2008-2009 financial crisis.

Through all of this, the market was higher for the first quarter, led by the NASDAQ and large-cap technology stocks. Last year’s laggards – technology, consumer discretionary and communication services – turned into first-quarter leaders, while last year’s leaders — energy and utilities — were the laggards. 

Money market funds soared with total inflows of $5.1 trillion, far exceeding the pandemic peak of $3.2 trillion. This was a result of the Fed raising rates nine times over the last year as well as a lack of confidence in small and regional banks following the Silicon Valley Bank fallout. We expect to see a dramatic tightening in lending standards enacted this year. Small to mid-size banks are likely to be subject to stricter regulations, such as higher capital and liquidity requirements, periodic stress testing and restrictions on types of investments banks can employ in their bond portfolios (similar to the largest financial institutions).

Looking ahead, the equity environment remains focused on inflation, residual banking turmoil, the Fed and interest rates and the prospect of a recession, both here and abroad. We continue to watch the labor market — which showed strength in March with the unemployment rate near a 50-year low — consumer liquidity constraints, commercial real estate markets and how these factors play out on corporate earnings and ultimately margins. 

Expectations about the Fed and interest rates have shifted in the wake of the banking crisis, and the market is forecasting that we may be close to peak rates for the current cycle. If that is the case, equities could benefit. The chart below shows that in the six-month periods after federal funds have peaked, stocks gained an average of 11%. In the seven such cycles going back to 1981, five were positive and losses were relatively small in the two periods where stocks were negative.

Russell 1000 6-Month Forward Returns Following Peak Rates

Stocks have had two consecutive quarters of strong returns. History shows that consecutive 5% quarters rarely happen in the middle of a bear market. More often than not, they happen at the start of a new bull market. As the chart below shows, the rare signal suggests the potential for more strength. Two quarters later, stocks have been higher 21 out of the past 23 times after this bullish signal.

Back-to-Back 5% Quarterly Gains Rarely Lead to New Bear Markets

Consecutive 5% Quarterly Gains for the S&P 500

We expect volatility to continue as overall market sentiment is historically low. The consumer remains strong, despite increased credit card debt and decreased savings levels. For now, the positives outweigh the negatives in the current market. The Fed seems to be nearly through raising rates, inflation continues to fall, global manufacturing is rebounding, China continues to reopen, and employment remains strong. The key for investors is to remain calm and look past the turbulence — and be ready to act when opportunities arise.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: BofA Merrill, Carson, Horizon

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

We continue to watch the battle of the Federal Reserve vs. inflation play out in front of us. Will inflation continue to drop? Did the Fed move too early in reducing rate hikes? Will the Fed continue to raise rates longer if inflation remains persistent? Will additional rate hikes cause further pressure on the regional banks? 

The Federal Reserve is facing one of its most difficult policy decisions as it grapples with stubborn inflation data and a simmering bank crisis. The Fed announced Wednesday it is raising rates another 25 basis points; the Federal Funds rate is now 4.75% to 5%.

Inflation started picking up in the spring of 2021 as the economy came roaring back from the pandemic. At first, the Fed dismissed the resurgent price spikes as temporary or transitory, assuming they would resolve themselves when supply chains returned to normal. As we know now, supply bottlenecks lasted longer than expected, and inflation is still the main topic of conversation almost two years later.

By June of last year, the consumer price index was 9.1% higher than the year before and the highest in four decades. The Fed raised rates for the first time a year ago, in March 2022, and it has now raised rates nine times. Inflation has edged lower since the peak in mid-2022. However, the Fed has not yet won the war with inflation; new data show an upturn in inflation and a stronger-than-expected economy.

Consumer Price Index: All Items, Month Over Month

A concern is that inflation may prove harder to slow than initially thought. Households have increasingly shifted spending away from physical goods to experiences, such as traveling, restaurants and entertainment. Inflationary pressures also have shifted from goods to services. With all these moving parts, what are the factors that make up inflation?

Inflation can be separated into three broad categories – goods, shelter and wages. Right now, each group is fighting its own fight:

• Goods prices include a variety of tangible items such as eggs, cars or gasoline. Prices of goods tend to move quicker than others. We have all experienced a quick rise in gas prices. More recently, the egg shortage due to the avian flu has caused prices to rise dramatically. Consumer durable goods — those that don’t have to be purchased frequently, such as appliances, computers or televisions — are lower than they were a year ago, and leading indicators suggest further price easing still is to come.

• Shelter prices consist of two major components: home prices and rents. Both tend to move more slowly than prices of goods. We are starting to see signs of easing in this category. As of January, existing U.S. home sales had decreased for 12 consecutive months. In January, the median sales price of existing homes increased by 1.3%, the smallest gain since February 2012. 

Year-Over-Year Median Sales Price of Existing Homes

• Wages tend to move much more slowly, and once they are elevated, become more difficult for the Fed to reduce. Jobs remain plentiful as employers added 517,000 jobs in January and 311,000 in February. The unemployment rate moved up to 3.6% but remains close to historically low levels. Average hourly earnings rose 4.6% from a year ago, but this was less than expected and may be a sign of easing wage pressures.

Monthly Job Creation in the U.S.

January 2022 through February 2023

The Federal Reserve has a tough battle on its hands between inflation, the recession and the banking crisis. How much can the Fed raise rates now that several banks have collapsed under the weight of eight interest rate hikes in a year?

The fight over the Fed being data-dependent, how much to continue raising rates and how much to keep the economy from a hard landing into a recession will lead to continued volatility and turbulence. It is important to remember that it does take time — typically 12 to 18 months — for rate hikes to work their way through the economy, and the Fed is taking that into consideration. 

It is also important to remember that the stock market is forward-looking and efficient. Publicly known data is already priced into the market. It is the unknown economic data and the Fed’s reaction that we will continue to monitor and keep you updated about along the way. 

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: AP, CNBC, Kestra Investment Management

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The rise of artificial intelligence has become a major theme in the first few months of 2023. AI has played a large role in our everyday lives for some time now, but aside from comments by companies like Nvidia, Microsoft and Google in their conference calls, many investors may know little about it.

History of Artificial Intelligence

AI is defined as “the study and development of computer systems that can copy intelligent behavior.” In a primitive form, the concept of AI goes back to the Age of Antiquity, but modern AI began in the 1950s with work by John McCarthy, Alan Turing and other computer scientists who sought to prove that computers could be programmed to mimic humans’ problem-solving capabilities. 

The surge in the field of AI has been fueled by exponentially growing amounts of data and data-processing capabilities that allow computers to better manipulate the numbers. As computers have become faster and able to process more data, AI has become more relevant. (Those of us who were teenagers in the 1980s might remember the question “Shall we play a game?” from the movie WarGames, in which AI shows through simulation that no one would win in a nuclear war.)

Types of Artificial Intelligence

There are two broad types of artificial intelligence: Narrow AI and General AI. 

Narrow AI performs a single task without sophisticated programming; think of Siri for Apple, answering questions that are asked of it. Narrow AI is based on machine learning, constructed through a set of algorithms that try to imitate human intelligence. Machine learning uses data and statistics to better “learn” the data to improve its ability to solve the task at hand. Deep learning is a type of machine learning that tries to imitate the human brain, taking the data through a biologically inspired neural network and processing the data to make connections and create patterns.

General AI is more complex and tries to mirror human intellect. It uses its ability to learn and apply knowledge learned to solve problems. We are still in the process of moving from narrow AI to general AI. This is why the field of AI is so exciting to so many people — we are still in the very early stages of what we can do with it.

A lot of companies use the term AI in their marketing efforts, but the ways it is used vary widely. Here are some examples of how industries are using AI today:

• Medicine: AI aids in producing sharper images more quickly for radiologists by using algorithms, helps to assess heart muscle functions through cardiac ultrasound technology and assists drug discovery by determining if new drugs are more effective than older ones.

• Search: AI-powered search technology refines the relevance of search-engine results, powers the ability to chat and helps users compose content. In announcing Bard, a conversational AI service in development, Google’s CEO recently said that AI will “distill complex information and multiple perspectives into easy-to-digest formats.” 

• Chatbots: Consumers benefit from AI as it is used to remove frustration from calling customer service centers and enables machines to answer frequently asked questions, take orders, track orders and direct calls.

• Maps and navigation: Services use AI to deliver optimal routes, road barriers and traffic congestion through wayfinding apps and services. Using machine learning, algorithms remember buildings, roadways and other landmarks to allow for better visuals on maps.

• Facial detection and recognition: AI powers technology that uses facial identification to unlock our devices and enables facial-recognition surveillance efforts by airport security.

• Text editing and autocorrect: Algorithms use machine learning and deep learning to identify incorrect usage of language and recommend corrections. Tools such as Grammarly can check our work before we submit papers and check our spelling to make sure there are no errors in emails.

• Social media: Applications are using the support of AI to monitor content, suggest connections and advertise to targeted users to ensure that we are plugged in. Social media AI has the ability to understand the types of content that resonate with users and suggest similar content.

• Electronic payments: Banks are leveraging AI to facilitate customers’ payment processes — making deposits, transferring money and even opening accounts.

Nearly every part of your day is touched by some form of AI. Automated learning and discovery through data add intelligence to existing products, achieve accuracy through deep neural networks and deep learning, and gets the most out of data. The goal of AI is to provide software that can reason on input and explain on output.

AI will continue to provide humanlike interactions with software and decision support for specific tasks — but it is not a replacement for humans (at least not in the near future)! As it evolves, AI will continue to provide important breakthroughs, especially in the field of medicine, for years to come.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter.  In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: AI Time Journal, Bloomberg

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The Federal Reserve announced another rate hike last week, raising the federal funds rate to a range from 4.5% to 4.75%. Though it appears the Fed may be close to the end of its rate-hiking cycle, additional increases are still likely — probably more similar in size to 25 basis points than the more aggressive rate hikes of 75 basis points that we saw last year. The Fed’s statement said that “ongoing increases in the target range” would be appropriate. Fed Chairman Jerome Powell said that “while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.” He also said rate cuts later this year are not likely. 

Some key highlights from the Fed’s take on the economy and next steps:

• The U.S. economy slowed significantly in 2022, but indicators suggest modest growth in the first quarter of the year. (Remember that fourth-quarter GDP was 2.9%.)

• Ongoing increases in the federal funds rate are appropriate, and “history argues against relaxing policy prematurely.”

• Shifting to a slower pace of rate hikes allows the Fed to better gauge how the economy is responding.

• The Fed’s focus is on sustained changes, not short-term moves.

• Regarding the debt ceiling: “Nobody should assume the Fed can save the economy if there is a default.” The only way forward is for Congress to raise the debt ceiling limit.

Even as the Federal Reserve raised rates by 25 basis points last week — its eighth hike since 2002 — savings account rates have remained low. With inflation at its highest level in four decades, the cost of holding cash is magnified as investors are left with a reality of negative real savings rates. As the chart below illustrates, the average savings account interest rate is paying .3%, while the effective federal funds rate is now 4.5%. Major banks continue to offer little in the way of savings rates.

More attractive yields exist for those with excess cash, whether in money market funds or short-duration fixed income, such as Treasury bills. To put this in dollar terms, if you have $100,000 in a savings account earning .3% per year, you will earn $300 in interest. That same $100,000 earning 4% in money market or Treasuries earns $4,000 a year in interest income — an increase of $3,700 for sitting in cash! That is a significant number of dollars potentially being left on the table.

On the back of the Fed announcement and Friday’s very strong job report (517,000 new jobs were created in January, and the unemployment rate fell to a 53-year low of 3.4%), the market (S&P 500) experienced moves of more than 1% all five days last week. This has happened only 23 times since 1953.

The chart below shows that when this has occurred, the average return has been almost 25% one year later. The bond market also experienced volatility, initially moving higher to start the week and then dropping based on the Fed statement, only to rally on Friday and send yields higher after the job report. 

The bond market is now pricing in that the Fed may make one more rate hike next month and that it may not cut rates later this year. The recent GDP and labor reports show that this economy is not in a recession. There are pockets of the economy — such as housing — that are in a recession, but the overall economy remains resilient. 

As long as demand (GDP) and employment remain as strong as they are, the Fed will remain hesitant to cut rates and may even continue to raise them past the 5% federal fund target level. Remember, the stock market is a leading indicator, and it should lead the economy as it eventually stabilizes. 

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bespoke, Goldman Sachs, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

As we all are aware, bonds experienced a significant meltdown in 2022. Historically thought of as the boring, relatively safe part of an investment portfolio, bonds typically are a shock absorber. As we wrote many times last year, bond returns were anything but boring. Edward McQuarrie, a professor emeritus at Santa Clara, said 2022 was the worst year on record for U.S. bond investors; longer-dated bonds like the 30-year U.S. Treasury lost 39.2%. (You would have to go back to the late 1700s to find a worse return!)

Returns on U.S. Bonds Hit New Historic Lows in 2022

The bond dynamic appears to be shaping up very differently for 2023. The Fed is poised to continue raising rates (even as we write this, the Fed will raise rates again this week). However, the increase is unlikely to be as dramatic as 2022. Strong yields and the prospect of a less hawkish Federal Reserve are breathing new life into bonds. (A hawk is one that supports higher rates, whereas a dove supports lower rates.)

In 2022, there was pessimism in the global markets that was tied to central banks raising rates to rein in decades-high inflation. Both the stock and bond market indexes were down double digits. The losses were unique, with 2022 being the first time in 45 years that both stocks and bonds declined together. The chart below shows stocks and bonds going back to 1977. Notice that 2022 is the only year in the bottom left quadrant, reflecting same-year declines for both.

Annual Returns for Stocks and Bonds Since 1977

After the Fed hiked rates seven times last year, bonds today offer more income and higher return potential. The yield on the Bloomberg U.S. Aggregate Bond Index, a widely used benchmark for investment-grade bonds, ended the year at 4.68%. This same index ended 2021 with a yield of 1.75%. Bond return comprises both price changes and interest paid. With higher yields, bonds offer more cushion from the income component compared to the start of last year. In the past three decades, bond total returns were driven predominantly from the coupon component, not price changes. If bonds today offer more income and higher coupons due to higher rates, there is a chance for potential higher returns in fixed income.

Total Return Components of the Bloomberg U.S. Aggregate Index

Investors are hoping that we do not repeat the same interest-rate volatility that hit bond markets last year. Inflation is moving in the right direction, and the Fed has dialed down the pace of hikes. Signs of a slowing economy have started to appear beyond the softening of housing demand. Consumers have begun to pull back on buying cars, and retail sales softened in December. The Fed wants to see lower inflation and to achieve that, it needs unemployment to rise and GDP — i.e., demand for goods — to fall.

As of now, the market expects the Fed to pivot from rate hikes to rate cuts either later this year or early in 2024. That would be a positive for bond prices as yields would begin to fall. If we happen to enter a recession, Fed policymakers could look to rate cuts sooner, which in turn would boost returns for fixed income even further. 

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter.  In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, CNBC, Capital Group

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The clock started ticking last week on the drama surrounding the debt ceiling. The United States hit the $31.4 trillion debt ceiling on Jan. 19, triggering the Treasury Department to start taking extraordinary measures to prevent a default. Although the crisis probably is five to six months away, concern about whether a deeply divided Congress can find a path to raise the debt ceiling will be a critical issue this summer.

What is the debt ceiling?

Established by Congress, the debt ceiling is the maximum amount of money the federal government can borrow to finance obligations that lawmakers and presidents have already approved. It was originally created more than 100 years ago, and it has been modified more than 100 times since World War II alone. Though its original purpose was to make it easier for the federal government to borrow money, the debt ceiling has become a political battleground as a way for Congress to restrict the growth of borrowing. Increasing the debt ceiling does not authorize new spending commitments; it allows the government to meet its existing obligations. 

What would happen if the United States were to default on its debt?

If the government were no longer able to borrow, it would not have enough money to pay its bills, including interest on the national debt. It would probably have to delay payments or default on some of its commitments, potentially affecting Social Security payments and federal workers’ salaries. Thankfully, this has never happened, so no one knows exactly how the Treasury would handle the situation. In a letter to Congress, Treasury Secretary Janet Yellin wrote that the department would begin employing “extraordinary measures” to help delay the point at which the nation might default on its debt.

What are “extraordinary measures”? 

The Treasury has employed measures more than a dozen times in past debt-ceiling battles to prevent a default by allowing lawmakers more time to increase or suspend the limit. These measures include suspending new investments in various retirement accounts for government employees. These funds count against the debt limit and would therefore reduce the amount of outstanding debt subject to the limit, providing the agency with additional capacity to continue funding the government’s operations. No retirees would be affected ultimately, though, as the funds would be made whole once the debt ceiling was agreed upon.

Will Congress raise the debt ceiling?

The closest the United States ever came to default was the summer of 2011, when Standard & Poor’s downgraded the U.S. credit rating for the first time ever and the S&P 500 fell by more than 16%. Congress eventually reached a compromise in early August, raising the debt limit just days before the country would have defaulted. Those conditions are similar politically to what we have today with a Democrat in the White House, Democrats holding a slight majority in the Senate and Republicans holding a slight majority in the House. The drama will play out over the next several months, but ultimately the two parties will have to negotiate a solution. Currently, neither party is in a rush to begin working on a deal. 

What is the potential impact on the markets?

The stock market historically has not reacted until the default deadline is much closer. In 2011, the market downturn started about a month before the deadline and accelerated as the deadline approached. Market volatility increased as the deadline drew closer. At this point, we are five to six months away from a potential crisis point, so the market reaction is expected to remain calm for now. While the path to resolution is uncertain, a default would be an unprecedented event that would have dramatic repercussions in the global financial markets. But this has never happened before; Congress has always managed to reach an agreement, and we think that this time will be no different.

All of these factors will have a much larger effect on investor sentiment over the next few months than the looming debt-ceiling drama.

As we get closer to the default deadline, we will determine if any changes need to be made to the portfolios. We would like to reiterate that a default has never happened, and we will continue to monitor the issue diligently.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter.  In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Brookings Institute, CNBC, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.