It's been a long and stressful ride in the financial markets the first half of 2022 and everyone is ready for the uncertainty to end.
In our newest episode, Natalie Picha, Glenn Royal and Jason Strzyzewski compare real market data to what everyone is reading and hearing in the news.
If you are having nightmares about the return of Recession 2008, the world now is a much different place. There is no need to panic.
Get to know us at: www.royalharborpartners.com
Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.
Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.
https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530
It's been a long and stressful ride in the financial markets the first half of 2022 and everyone is ready for the uncertainty to end.
In our newest episode, Natalie Picha, Glenn Royal and Jason Strzyzewski compare real market data to what everyone is reading and hearing in the news.
If you are having nightmares about the return of Recession 2008, the world now is a much different place. There is no need to panic.
Get to know us at: www.royalharborpartners.com
Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.
Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.
https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530
Welcome to the RHP Market Talk Podcast, Episode Number 21. Brought to you by Royal Harbor Partners Wealth Management, located along the beautiful Gulf Coast of Houston, Texas serving families across the country. I'm Natalie Picha, founding partner...
Glenn Royal:... and I'm Glenn Royal, founding partner.
Jason Strzyzewski:I'm Jason Strzyzewski, Investment Analyst.
Natalie Picha:So, welcome everybody. Glad to have you here today. Thank you to our listeners. I don't wanna say, this is just a repeat of our last discussion, but I think it's just a continuation. And probably gonna build that out a little bit. Inflation print. Might as well just start there. That's what everybody's talking about today.
Glenn Royal:Yeah, it came a little hot.
Natalie Picha:...little hot...
Glenn Royal:Yeah, little hot 9.1 versus expectations of 8.8. What do you think about that Jason? You've seen a lot of inflation since you've been here in this short time.
Jason Strzyzewski:Yeah. I think more than anyone would like at this point. You know, we wanted to call a peak inflation. We've wanted to see that for quite some time. And it was under the thought that once a lot of these supply chain issues started to clear up, we would see some relief. But no one could have anticipated all of the geopolitical issues that have arisen this year. So that also playing into the fact where you have energy getting choked out from half the world. We're gonna be stuck with this for quite some time. And additionally, you know, you have other pockets of the market going into energy. You know, you're looking to increase a build out for infrastructure for these plants and these production facilities where they're several years behind. And they need to build bigger exponentially. So to meet these new demands, you know, you've got LNG plants that need to...they're used to importing. And now all of a sudden 80% is exporting to Europe. So, to build that out and to facilitate it, that's gonna increase the cost of those materials to get that done. And you've got housing. That's a whole other story as well. I mean, what do you think about that? Glenn?
Glenn Royal:We're seeing the pockets. Obviously housing. Shelter costs are sticky. They're gonna stay in the numbers for a while. That will keep inflation prints higher as a result of that. But we just saw the second half of June was energy prices coming down. Mainly because people are expecting a recession. And so that's pulling down the commodities that had such a strong bid earlier this year. It hasn't changed the structural dynamics of the demand for energy. The under investment that's in that space. All that. We can make a bull case for energy, as it ties back to inflation. You're starting to see pressure on energy that should start to make, you know, here's that word again, but are we peaking in inflation in here? And there's arguments that can be made that possibly we are. Expectations are for it to trend down. You know, 3-1/2, 4% next year. Still stay elevated. Compared to the history's gonna be hard for the Fed to drive it back down to 2%. without maybe a continuation of raising rates at another time. But the biggest thing about the inflation that I would like people to focus on, is that it's normal. You know, you're either driven by supply or demand cycles. Shortage of supplies that we've all dealt with logistics. Or excess demand after all the money in everybody's pocket. That has an impact on inflation. But the bigger impact is the psychology surrounding inflation. So, we talked a bit about this number just now. High or lower, all that. What really matters to me going forward, is are we going to bake into the cake our thinking like we had in the seventies? That if I don't buy that product today, it's gonna go up in price on me next week. So I better go get it today. So that starts to bake that inflation longer in the story. We're not seeing that right now. I still see people, balking. Energy price is a good example. You start getting that demand destruction. When they got too high on gasoline prices. So we're still at that point, we haven't tipped over to that in psychological risk of higher inflation. But it's something that's on the table today that we're curious about.
Natalie Picha:So let's just talk about a little bit about the difference between CPI and core inflation numbers and where those came in. Because core came in at 5.92 versus the CPI at 9.1.
Glenn Royal:Yeah. That's the difference between energy and food, right? So it's food and energy are very volatile components of CPI. So the fed likes to strip those two out. And we focus on the core rate. Both of these, whether the regular top rate, the core rate, rents are very, very high components of that... north 30%. That's where we're still seeing the inflationary pressures in housing prices and rent equivalents. That's gonna keep this inflation story probably stickier than we would like. If I didn't have that. Used car prices are rolling over. We expect to see semiconductor chips finally meeting up with auto production. And you're starting to see that log jam. I think you guys just got your pickup truck after waiting for...
Natalie Picha:We finally got a truck after 14 months.
Glenn Royal:...waiting for a semiconductor chip.
Natalie Picha:Right!
Glenn Royal:So the logistics are catching up. Actually Goldman Sachs had on a one to 10 scale, of 10 being logistics or problem for the economy. One, no problem at all. That's come back down to five. So we're seeing a lot of improvement in logistic issues around the country. That should bode well for inflation. But again, I'm switching at this point away from supply demand concerns, to psychological expectations of inflation.
Natalie Picha:And so I saw an article out, I think I shared it with you and Jason, where the bond investors are showing signs that they expect the inflation to cool. That's what the bond market is saying.
Glenn Royal:Yeah. One of the measures we look at is, you know, future expectations of inflation. And one of those measures, the Feds five-year forward. If I take myself five years in the future and then had to guess what inflation's gonna be five years from that point in the future. If I go back to late last fall, into spring, inflation expectations were getting two and three quarters kind of long run in expectations. Since this concern about the recession, all that started to come... it's now dropped that down to 1.97. So anything that we're seeing on long term expectations, shows that the Fed's gonna succeed in getting inflation under control out in the next few years. And we're seeing that in the data. You know, it's energy prices, aren't gonna keep going. Used car prices aren't gonna keep going up forever. And so you're starting to see those things roll out.
Natalie Picha:Well and wouldn't you say that it's not just what the Fed is doing. It's not the Fed's action as much as also the supply chains picking up. Demand destruction happening. There's some, I think everybody needs to remember that it's not single. There's not one single element that's in this current situation.
Glenn Royal:What's under the Fed's control?
Natalie Picha:Exactly.
Jason Strzyzewski:Exactly. The important thing to remember too, the Fed's tools are blunt. And Fed Jerome Powell, we're seeing that he came out, he's stating that they are committed to addressing inflation and getting it under control. Now, the concern is, we went from not going and doing enough, to all of a sudden, a day later, doing too much too quickly. So talking about that psyche in the market and those concerns. Things are moving so quickly. We can see probabilities based on Fed funds futures, on what the market is actually pricing in probabilities, Of what the next meeting, what hikes will occur in the next meeting. 27th, exactly. July 27th. What comes out now yesterday, which is now July 13th, we had the bank of Canada. They hiked a full percent. Following that news the probability shot through the roof, seeing about 80% probability that we would also see that full percent hike. Now then today, July 14th, you had Waller, Fed official, come out and say more. So we're getting a little ahead of ourselves. 75 basis points hike is more realistic. And this is all in a span of two days. And then the probabilities go way down to about 40% for the full point. So it's just an example of how quickly things are moving in this market.
Glenn Royal:It is. The market participants are, you know, we always try to price expectations of a fed hike and how much it will be. And we use financial futures as Jason was talking about, to find out what those are. Those probabilities of hikes. What I find so fascinating is the last cycle. When we had the last CPI print, he just said at University of Michigan consumer sentiment index that came out, which was really poor. It caused the Fed to leak out through the Wall Street Journal that then said of half percent point hike. They were gonna go to three quarters. And they did do that three quarters. Surprised everybody by that extra quarter of a point hike. Now the discussions of the market is...then what was, you know, you had pressure in that fed because they were behind a curve on inflation. They raise rates. And as soon as they went to 3/4, it wasn't 24 hours later...
Jason Strzyzewski:Ooo too much! It's too much!
Glenn Royal:...too much. Now you're gonna throw us some recession. So here we are now. And now the market's wanting to Fed to go 1% full hike versus the 3/4. It's on the table. Half to point to three quarters. And here we are again.
Jason Strzyzewski:And mind you, last meeting they said, 75 basis points. Don't expect this. This is a one time thing, almost. And now all of a sudden is 1 the new.75?
Glenn Royal:And that rate of change...we've talked a little bit about that. You've seen that in these numbers. So, we talked about how fast the markets move. So, with the market psyche bouncing all around at 1...3/4 quarters, half point, whatever. What you're seeing is a Fed is acting. And they're raising rates. Generally. It's a quarter of a point over a year and a half.
Natalie Picha:It's slow and steady.
Glenn Royal:Well every six weeks...year and a half. This time we've had one or three quarters, in our, in two months. About to have another 3/4% to 1% hike. The steepness of that change coming off of 5,000 year record lows and interest rates. Remember we started the year at the federal funds rate at a 1/4 point. That I think has rolled into all the damage you've seen in these markets. From equities of fixing them. It's the worst market. Since that, we go back to the twenties of a balanced portfolio. Because the bond market got whacked off that 1/4 of a point rate hike. And then, you know, equities with concerns of a recession, right?
Natalie Picha:Generally speaking, people anticipate that their bonds and their stocks are gonna move in opposite directions.
Glenn Royal:Historically they have. There's been every reason to expect that.
Jason Strzyzewski:Now, I think the main concern is, a lot of top of mind questions. Are we in a recession? Are we going there? And I think with the Fed's action, that is getting even a little bit louder. The important thing to know, and Glenn can talk about this as well, is the damage that we've seen in both equity and bond markets this year, has been substantial. When you look at it on a historical basis, to other recessions. We're two thirds or three fourths there, depending on, if you look at earnings destruction, taking price earnings multiple down to about 14 times. Plenty of different analysts have estimations at certain price points. But we're most of the way there on the activity this year. But the good news in this, is you know, this is the time to...this isn't time to be fearful and jump out. And I know all year long we've said...hold on to the roller coaster. Hold on. Well, the ride is most of the way through. Who knows when that ride ends or how long it goes. But keep hanging on, I guess. And Glenn, what do you think?
Glenn Royal:And that that's kind of getting into a question and I know you're getting a lot of questions, Natalie. You're center point of this firm. You're the relationship manager for a lot of clients and they come to you. What is it that questions you're hearing from the clients? What are their concerns? Top of mind on that?
Natalie Picha:Well, I mean, you know, I hate to keep beating the same drum. Like Jason just said, of don't jump off the roller coaster in the middle of the ride. That really is the message I'm giving to clients right now. What they're asking is...no one likes a bear market...so everybody's asking, well, when is this gonna be over? I just want it to end. Can it please just stop? And the truth is, markets are up three out of four times and they're down one out of four times. And so my response is, you know, what opportunities are made in down markets. We never expect markets to stay high. We know that markets go low. And what you do is you act defensively when you can. Where you can. And you take advantage of opportunities. When you see that. You have to understand what you own. And that's kind of how I'm explaining it to clients is. Keep in mind if you own a hundred shares of X, Y, Z, and it goes up today, but down tomorrow, you still own a hundred shares of X, Y, Z.
Glenn Royal:Unless you own crypto.
Natalie Picha:Well, that's a whole topic for another day!
Jason Strzyzewski:I was wondering if that was gonna get sprinkled in?
Natalie Picha:That's another conversation, right? And then clients are absolutely concerned about the inflation, right? Because it's hurting them. When they go to the pump. When they go to the grocery store. But I keep reminding everyone like we were talking about earlier, that there's multiple things involved in this inflationary story. It's not just one thing. You can't one finger in one place. We're coming out of a pandemic. And a lot of the numbers that we're seeing are pre-pandemic numbers. But structurally, we changed a lot of things in the last two years. We changed how we work. We changed where we go. And those structural changes aren't going away.
Glenn Royal:That's productivity enhancements.
Natalie Picha:Absolutely. So, there's a lot of things that we're still coming out of. I don't think we completely understand. I loved the numbers this last week. And Glenn, you could probably speak to this better. Because you've probably got the numbers right in front of you, but where we are the U.S. deficits and the balance sheet of the U.S. Government. Which everyone was just really screaming about going back just two years. That's changed.
Glenn Royal:Yeah. Yeah. It has improved. Mainly because tax receipts were up so much. With all the stimulus money that went out. So you have seen improvement in government balance sheets. You know, I know how investors think. We tend to anchor our bias on the recent past.
Natalie Picha:....something very recent. Recency bias.
Glenn Royal:So our recent past bad event. Prior to pandemic is the great financial crisis of 2008. The mortgage blow up. Right? That's what I think a lot of mindset is in the market. And how people are reacting. But very, very different from that period. It's not 2008 by any stretch. The banks are much, much better financial condition. Governments that we just spoke about, their balance sheets are better as a result of all the tax receipts that come in. The consumer. Now we are starting to see the consumer spend a little bit of money. Into deficit spending a little bit. They've spent all that money that they got from the pandemic. But they're still out there spending. They're still active in doing what they're thing. And if I look at the housing side of it, we've got a shortage of 3 million units of housing in this country. The credit scores on consumers. The FICO scores. Of what we saw purchasing homes in the last four or five years or the highest on record. All the top 760 plus scores. Versus what we saw in 2008. Which was, if you had a pulse...you could fog a mirror...then you can get a mortgage. Yep. It's a whole different world now so I wanna set that context to have everybody understand in terms of how much further does the downside go? When is inflation end? When does this bear market end? That's the question. First off we have to look and say, it's not comparable to 2008. We're not in that bad a shape. Which leads me to think that any recession that we do have...should it occur...will be of the milder variety. Doesn't have to be a deep, sharp contraction. But we see unemployment. Well, we'll see the classic signs of the recession. Yeah. Unemployment's gonna go higher. You know, these things are gonna happen. But it's not that bad. And the other thing is, if it were today, I would be arguing, now is the time to buy. We talked about this last time, we talked about that. We talked about that Foley's Red Apple Sale. But the reality is we've already had a decline, in line with the average bear market decline in the first six months of this year. We are there. The movement in rates. We've seen that start to stall out, moving higher as people starting to price in recession. Recently added some investment grade corporate bonds. That turned out to be a pretty good trade for us. So we're starting to pick up that opportunities and bonds. We're starting to see high, large cap technology stocks that were trading at 40 times earnings. Six months ago are trading at 20 times earnings. They're not the companies that they were in the Dot Com. These are established, tremendous revenue, type companies. We feel like as sharp as that selloff has been. The recovery...and that's one of the reasons we're at a point where we've already taken the draw down. It's too late to try to move around it. So what is it that you own? Where are you positioned for the recovery? That's what is keeping me awake right now. It's no longer about downside risk. It's about how do we have these portfolios positioned for the recovery? Are we in the right spot? Because it comes so fast. Time in the market not versus timing. That's a good time. I know you talked to clients about that. And the main reason is when this recovery comes...if I miss four of those initial days. You know, 10 of those initial days, I miss 60% of that market recovery. It's as fast as it went down...it goes up. And the market is a leading economic indicator. So, while we may look like we're going into a recession. And things may be happening, the market's already discounted all that out. So, the market leads recessions and...in both ways, going in and coming out.
Natalie Picha:Well and that's a perfect point. This isn't a 2008. But when I talk to clients about how they're feeling, because a lot of what I see is feeling anxiety, right? It's the anxiety. It's the feeling. If we've done our planning right. If we've done the financial planning piece right. What we're looking for are very conservative, annualized, average returns. We don't look at the six months or even the 12 months. We're looking for 18, 36, 5 years, 10 years. You know, we're looking pretty far out. We're wanting to set your expectations based on your goals and the timing of those goals. You should have your emergency fund, well funded. When we're in these periods. We are working on their behalf to take advantage of the market. They aren't looking to pull out of the market. Right? Because,again, we can't call a bottom. We don't try to call a top. But we can look at the numbers and we can see the data and we can make some pretty good assumptions based on history. And say, as you guys have just mentioned, we're pretty much there. Valuations are back to where to where they were. Now we're now we're in that opportunity camp. Not that we haven't been. It's been an opportunity here off and on for the whole six months. In different pockets of the market. Which we've taken advantage of. But for clients to just feel like if your planning is done, right, you don't need to panic.
Glenn Royal:Yeah. Part of that too, is when we ask your time objective. The reason we're asking for your time objective...how much time do you have is...because these kind of markets happen. And I do get recovery in 3, 5, 10 years for sure. So, if you have an equity allocation and it was intended to be something you needed in two or three years, and you're all stocks, well maybe, maybe that's too high of equities. You should consider balancing that out. If I've got 20 years to retirement. Or my grandchild's retirement and a kiddy 401k or whatever, I got all the time in the world to recover from these. That's why I think it's so important to work with you and Michelle. When they're working on their financial plans to make sure their investment objectives line up with the realities of the risk of the market.
Natalie Picha:Exactly. Something else I just wanted to point out, that I made as we were talking about a comparison to 2008 and this not being 2008. There was a lot of work done post 2008. Where bank reserves...totally different numbers now. Amount of cash that had to be kept. All the regulations that got put in place. Dodd-Frank. Those kinds of things. I just feel like we need to remind people of why it is so different.
Glenn Royal:This isn't your father's Oldsmobile. Is that what you're saying?
Natalie Picha:Exactly. Yeah. Right. Yeah. I mean, it's not the same thing.
Glenn Royal:It's not. It's not by any stretch. I really think where I'm comforted in is the fact that we've had all these big draw downs already. That we are in line with past draw downs. That gives me comfort to be able to say. Now's the time to start bottom fishing. Where I could be wrong...let me give you my bear case. I'm not gonna put a high probability on it. But there is a bear case out there to be made that should we go into a harder recession than we expect. It draws earnings down in 2023 to 200 bucks a share on the S&P 500. And our put a bear market PE multiple of 14 times on that 200 bucks. It takes the S&P down about 3,150. So, we're not out of the woods. There is that potential. But I put that probability lower than the base case. Which is, that inflation will come under control. It's gonna allow the Fed at some point to take an exit. And you can't see this market trend higher towards that 4,600 type target for this year. You know, maybe not an absolute positive return for the year. But you've got 10 plus percent upside between now and year end. So, I lean more...that's my base case, but I'm cognizant that should pressures develop and things get worse. So you could shave those earnings off. And that could go us into an earnings from a session. Low probability, I think at this point, but something certainly that we're aware of. We're watching very earning season's out right now. We just started to today banks out. You hears some of the top line stuff and looks pretty nasty. And you think...oh, you know...immediate reaction is to sell the bank. But if you get into listening what the CEOs are saying, or reading about the banks and businesses, it's not bad. You know, they're kicking up loan, lost reserves a bit, you're not seeing a bunch of delinquencies or things of consumers in good shape. Our point is the base economy is in pretty decent shape. And the bank folks are talking to you today about it. We still got a couple more weeks of earnings and it's always a fun and interesting time around here. You know, earnings are what they are. That's when you hear us either shouting for joy or screaming in pain. Based on what earnings just came out in the morning.
Jason Strzyzewski:Pretty much.
Natalie Picha:Well and just a reminder too, when we're talking about markets, right? And we talk about...we have references to the S&P and this is something else that I remind clients of often. Is that what you hear in the media markets. You know, markets can mean a lot of different things around here. When we throw out markets, we'll refer to the S&P 500, which we have components of that in our portfolios, but that's not what most of our clients own. That's we are active managers. So we take a very different approach to that. And we are able to take advantage of the pockets of the market here and there. So, when you're thinking about what you're hearing in the media, don't get too caught up in just the news. Or just the media. Because it might not always correlate with what's actually going on either in your own portfolio or in the world for that matter.
Glenn Royal:We may have already acted on it.
Natalie Picha:... or we may have already acted on it by the time you're hearing it. Or thinking about it. Right. And so just be very cognizant of what you're taking in terms of information. And where it's coming from and make sure it's real.
Glenn Royal:Well reach out to us. I would encourage you. I know they reach out to you. Jason and I are here as well. We answer emails and phone calls. But you know, the clients have questions and we if don't dazzle with brilliance we'll baffle them with bull. But we'll get them through it. We'll give an answer.
Natalie Picha:Well, let's hope you do more than give them some bull!
Glenn Royal:I'm good at it. I was an elected official.
Natalie Picha:We want to thank all of our listeners for tuning in to RHP Market Talk. If you have questions or would like to discuss today's topics, please feel free to contact us through our website at www.royalharborpartners.com. At RHP, we're passionate about planning for your financial future. We're devoted to our relationships with multi-generational families, for the creation of successful legacies. Through our one-on-one conversations, we can help you navigate your personal wealth management investment journey. How different will your life look with the right advice? Thanks Jason. Thanks Glenn.
Glenn Royal:Thanks.
Jason Strzyzewski:Thanks.
Disclosure:Royal Harbor Partners is a registered investment adviser and the opinions expressed by Royal Harbor Partners on this show are their own. Registration of an investment advisor does not imply a certain level of skill or training. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.