Five Questions (and Answers) for Long-Term Investors
Inflation issues, the climate transition, the U.S. credit downgrade, AI hype and the outlooks in Europe and China are weighing on investors.


The trajectory for inflation and Fed policy, the odds of a “hard, soft or no landing” for the U.S. economy and the implications of the Fitch Ratings downgrade of U.S. debt are among the considerations influencing market sentiment. Although near-term developments are of undeniable importance to the direction of markets in 2023, most investors have a time horizon measured in years rather than weeks or months. Investors should focus on the long-term implications of recent developments, avoiding the temptation to overreact to short-term news.
Answers to the following five questions will provide important insight for long-term investors:
1. Will inflation return to the Fed’s 2% target and sustainably stay at that level?
Although inflation is moving toward the Fed’s target, 2% may become the floor for inflation rather than the ceiling. Deglobalization, fiscal deficits, climate change and inflationary demographics are among the factors creating a more volatile backdrop for inflation. Although central banks spent much of the past decade trying to push inflation up to the 2% target, the next decade may be dominated by central banks worrying about inflation breaking above target levels.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Consequently, the lows and highs in bond yields are likely to trend higher over time. With inflation rather than deflation a more persistent challenge, bonds will be a less reliable hedge against falling equity prices.
Long-term investors concerned about inflation should consider adding inflation-resistant investments such as real estate investment trusts (REITs), real assets, infrastructure and Treasury inflation-protected securities (TIPS).
2. What are the investment implications of the climate transition?
The climate transition will present opportunities and threats for investors. Weak conventional oil capital expenditures will create volatility in fossil fuel prices, with spikes in prices a consequence of periodic supply shortages. Refinery capacity will be an issue, leading to additional supply squeezes.
Although alternative energy capital expenditures will be strong, alternative energy sources are unlikely to ramp up fast enough to meet current climate targets. Duplicative supply may be needed for longer than expected in order to complete the energy transition.
Investors should consider investments in both traditional and alternative energy, recognizing the uncomfortable likelihood of a protracted and costly climate transition. “Enablers” that support the climate transition, such as natural resources and companies that facilitate production efficiency, may also be compelling investments.
3. What is the implication of the Fitch downgrade for bond markets?
Although the Fitch credit downgrade coincided with a wave of Treasury selling, prior downgrades of major-country debt have not had a lasting effect on yields. Recent jumps in yields have more to do with rising Treasury issuance, accumulated government debt and deficit spending.
In contrast to the corporate and household sectors, the U.S. government did not extend debt maturities while interest rates were low. The need to refinance government debt at higher rates will create strains for the U.S. budget and makes it likely that rates will not return to post-global financial crisis (GFC) lows.
With bonds still offering tepid yields relative to inflation, income-focused investors may need to supplement traditional bond holdings in the search for yield.
4. What is the outlook outside the U.S.?
European and Chinese stocks remain at relatively inexpensive valuations after more than a decade of mostly lagging performance relative to U.S. equities. Europe faces near-term challenges as the export-driven economic bloc faces headwinds from weak demand from China and continuing adaptation resulting from the loss of cheap gas imports from Russia.
Longer-term, however, the end of fiscal restraint and adaptation to the changed geopolitical environment will create interesting investment opportunities. Rising defense spending and the need for industrial efficiency and energy security in a world of higher prices and less reliable sources of natural gas will create investment opportunities for European industrial companies. European banks may also become more appealing in an environment in which negative interest rates are no longer a constraint.
Despite near-term challenges, there are also compelling investment opportunities in China. Market leadership is likely to continue to change in China, with the social media leaders of the post-GFC period giving way to leaders more in line with state interests, such as semiconductors, artificial intelligence (AI), health care and electric vehicle infrastructure.
5. Will AI live up to recent hype?
Excitement over AI turbocharged returns for stocks thought to be at the leading edge of AI development and adoption. AI is potentially transformative technology, but investors should be realistic about how quickly its growth potential will be realized. There typically is a long lag between technological progress and the commercialization of new, innovative ideas. Even if AI is as transformative as many experts suggest, it may be several years before it contributes to meaningful growth in productivity.
There are many ways to invest in AI. Enablers, including major cloud providers and semiconductor makers, that will drive the calculations behind artificial intelligence will benefit from AI adoption. Cybersecurity is going to become of central importance as AI becomes pervasive.
Industry adoption will also create opportunities for companies that effectively deploy AI. Wealth managers, insurance underwriters and power grid managers are among the companies exploring greater use of AI to enhance productivity.
As is the case with most disruptive technologies, today’s leaders may not be tomorrow’s winners. There are some well-entrenched businesses that will be net beneficiaries as they incorporate AI. However, others will be faced with an entirely new competitive environment.
Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal.
This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct.
related content
- AI Has Powerful Potential to Make Investing Decisions Easier
- Want to Get Rich and Stay Rich? Avoid 10 Investing Mistakes
- Nervous About the Markets and Economy? Consider History
- All About RSUs: How They Work and What You Should Know
- Four Reasons to Consider Staying Invested in a Down Market
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Daniel S. Kern, CFA®, CFP®, chief investment officer of Nixon Peabody Trust Company, is responsible for overseeing the firm’s investment process, research activities and portfolio strategy. He previously was the managing director and chief investment officer of TFC Financial Management. Earlier in his career, Dan was head of asset allocation at Charles Schwab Investment Management and managed global and international equity portfolios for Montgomery Asset Management. He is a contributor to TheStreet.com and ThinkAdvisor.com and a regular guest on Bloomberg’s Baystate Business and TD Ameritrade Network.
-
Quiz: How much do you know about nontaxable income
Quiz Test your knowledge of Uncle Sam's rare moments of generosity...
-
Quiz: How much do you know about Medicare?
Quiz Try your hand at our Kiplinger Medicare quiz. All the answers can be found in our Medicare articles so, if you're a regular reader, you'll have no trouble!
-
Five Mistakes to Avoid in Your First Year of Retirement
Retirement brings the freedom to choose how to spend your money and time. But choices made in the initial rush of excitement could create problems in future.
-
I'm an Investing Expert: This Is How You Can Invest Like Warren Buffett
Buffett just invested $15 billion in oil and gas, and you can leverage the same strategy in your IRA to potentially generate 8% to 12% quarterly cash flow while taking advantage of tax benefits that are unavailable in any other investment class.
-
Integrity, Generosity and Wealth: A Faith-Based Approach to Business
Entrepreneurs who align their business and financial decisions with the biblical principles of integrity, generosity and helping others can realize impactful and fulfilling success.
-
How Much Income Can You Get From an Annuity? An Annuities Expert Gets Specific
Here's a detailed look at income annuities and the factors that determine your payout now and in the future.
-
Your Paycheck Stops in Retirement, But Your Life Doesn't: An Expert Guide to Planning for a Confident Future
Social Security will replace only about 40% of your salary, on average. A solid financial plan will help you plug the gap so you can rest easy in retirement.
-
Are You Jeopardizing Your Future to Help Your Adult Kids? An Expert Guide for How to Not Do That
If your adult child needs financial help, of course you want to provide it, but crafting a plan that also protects your financial and emotional well-being is vital.
-
I'm a Financial Planner: Here Are Some Long-Term Care Insurance Tips for Every Age
Strategies include adding riders to life insurance for younger individuals and considering hybrid or traditional long-term care policies for those in their mid-50s and 60s.
-
Engineering Reliable Retirement Income in 2025: An Expert Guide
For dependable income, consider using a bucket strategy and annuities in tandem to promote structure, flexibility and peace of mind.