As we begin the 4th quarter, the S&P is up 12%. Were that to hold, it would mark the 4th straight year of double-digit returns domestically. That has not happened since the late 90’s when the S&P posted five straight years of double-digit returns. That was quickly followed by the infamous tech bubble of 2000-2002 when the S&P had double-digit NEGATIVE returns for three straight years. I start with that not to scare you, but I am getting a sense of unrealistic expectations that the “market always goes up” that you might hear from certain idiots on social media. I can assure you the market doesn’t always go up, but it tends to do that over time with a lot of angst in between. The concern would be that the AI frenzy is leading to a very similar bubble like the tech bubble we saw in the early 2000’s.
So, the question is, are we in a bubble? If you compare the economic environment of today to the late 90’s, the unemployment rate was low as it is now, labor participation was similar and trailing year earnings of S&P companies were similar. However, the current forward-looking P/E ratio (a measure of how expensive a stock is) is considerably cheaper than 1999 and that’s a good thing. It simply means that the earnings of companies are justifying the stock price. In terms of interest rates, the Fed was in a rate hiking cycle which we may very well be at the beginning stages of (the Fed just raised a quarter point in September). At the beginning of the tech bubble the Fed had hiked rates as high as 6.5% by December 2000, which was drastically cut to 1.75% by December 2001. So, any thought that a simple rate cut would be the answer if the market started to slide is not a given. And of course, in 2001, we also experienced the worst day in this country’s history. 25 years later we are still in “conflict” in the Middle East, which is wreaking havoc on oil prices and, subsequently, inflation.
I write all that not to alarm you, but to highlight how important it is for me to be able to provide the most diverse and nimble investment process I can provide, especially for my retirees. The investment landscape is always changing, and it has changed dramatically in the world of fixed income. The once prized “safety” of many retirees has become a drag, if not an actual negative when it comes to investment performance over the last five years. Therefore, new ideas need to be looked at to provide the necessary safety while also providing the non correlation to the market that bonds once provided.
The question I am asked the most, by far these days, is how am I using AI in the practice? In its current form, AI has become an invaluable tool for our back office. It’s like having a full-time assistant to run secretarial tasks. This frees up Judy to be much more involved with client engagement as I’ve always envisioned her role to be. In fact, Judy is now on steering committees for one of our AI tools and is at the forefront of helping these tools integrate into the practice. That in turn has freed me up to spend more time on you, the client, rather than administrative tasks and paperwork. AI is NOT making investment decisions. I would recommend you pick your favorite AI engine and ask for some stock picks. I don’t think you’re going to be blown away by the responses you get.
That is simply where we stand today. I expect AI’s role to continue to grow in the financial advice space. That means I’m responsible for staying up to date on the lates advances. I’m responsible for finding partners who are open minded to what AI can do for the financial planning process while still maintaining a human touch. If you have been with me for this whole 15-year ride, you have seen me make changes in the past when I felt it was in the best interest of all of you. As I wrote in 2021 after the launch of the company, “I want Birds Eye to be more personal.” Ironically that’s what AI is currently doing for us. It takes so much of the administrative work off the table, it allows for Judy, Brendan and I to be in front of you instead of constantly managing compliance and paperwork. In addition to being able to see clients more, AI allows more time for research (utilizing AI tools), it has strengthened the quantitative analysis behind that research, and I will continue to find the right partners to integrate everything together to give you the financial planning experience you deserve, along with a top-notch investment process.
So, thank you for the trust you put into myself, Judy and Brendan. It’s truly valued. And I can’t stress that enough, we always welcome feedback even if it’s not great. I can’t fix what I’m unaware of.
As always, feel free to share this with anyone you think might benefit