What's in store for 2023?
More rate hikes? Yes.
Geopolitical uncertainty? Always.
Has inflation peaked? Possibly.
Listen in as Natalie Picha, Glenn Royal, and Jason Strzyzewski tell you why they are a little optimistic for 2023.
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
What's in store for 2023?
More rate hikes? Yes.
Geopolitical uncertainty? Always.
Has inflation peaked? Possibly.
Listen in as Natalie Picha, Glenn Royal, and Jason Strzyzewski tell you why they are a little optimistic for 2023.
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 26. 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, a founding partner.
Glenn Royal:And I'm Glenn Royal, a founding partner
Jason Strzyzewski :I'm Jason Strzyzewski, Investment Analyst
Natalie Picha:Welcome to 2023, guys!
Jason Strzyzewski :Yeah. Here we are.
Glenn Royal:Glad to be here. Glad I made it.
Natalie Picha:Here we are. I don't know about you. 2022 was the roller coaster ride. We talked about it all year long—crazy ups and downs. I'm hoping for a bit of a smoother ride here in 23. I know all the focus has been on the Fed, and we had so many fed rate hikes in 22. What are we looking at for 23?
Glenn Royal:More the same. More?
Jason Strzyzewski :Yeah. A little bit more,
Natalie Picha:But maybe not as many. Can we hope that not as many, right?
Glenn Royal:There's some silver lining. Yeah.
Natalie Picha:Yeah. Right, right. So, I mean, you know, we went from about a half of a percent all the way up to a four and a quarter, and now we're looking at maybe one or two more this year.
Jason Strzyzewski :Yeah. So right now, Natalie, we're at four and a half. And the next month, the next hike, we're anticipating another 25 basis points. That'll take us to 4.75 and then another 25 taking us to about five. Now, the divisiveness across the street is really, do we go higher than that? How much higher? Do we pause? How long do we pause? Everyone's kind of all over the place. And that's really kind of the market that we're in right now, coming to the end of this hiking cycle. At least the first part, I'll say. Now the good news is we're starting to see positive signs in the fight against inflation. So, tomorrow, on January 12th, we have the next CPI print, and the street's anticipating 6.5%. Now, the past two prints, we've come in lighter than expected, and we've seen, you know, strong rallies in equities because of that. Could we see that again, potentially, you know, we've had not as bad and not as feared winters in Europe, which has led to energy kind of coming off the boil a little bit? Price-wise. Inventories are going up there. And then also, you know, we're seeing a lot of strong economic data, uh, with wage growth that's finally coming down all while the jobs are still there. So. That's a little bit of conversing right there. But it shows us; the good news is we have, again, like we've said plenty of times on this podcast, we have a strong enough economy to be able to do this, all this hiking and this speed of it as well.
Natalie Picha:Right, right. So the next two fed meetings where we're expecting these quarter-point hikes will be February 1st and March 22nd. And what I'm hearing out there... the big question is will we hit 5%, or will the Fed have to actually, you know, pause, or will they have to reduce? Are we going to be at 5% here in 23?
Glenn Royal:That's what you have forecasted right now that we'd hit the five handles on Fed funds in the next two meetings. However, if you want to look at a proxy, take a look at the two-year treasury note, and that's the market. So I've got the Fed that wants to do what it wants to do, then I got Mr. Market. that doesn't care so much. We saw that with the guilt issue in the UK earlier this year when they had that big selloff. Same thing; Mr. Market wins bond vigilantes. What the bond vigilantes are telling you is that, uh, fed funds are right now the two-year trends at, uh, about 4 23. So we're good. Seventy-five basis points away from 5%. Often the Fed is not able to hit that target rate more often than not. We may; they may be forecasting five, but the economy kind of change their hands as they get closer to that end game. So it's debatable. They probably will get five. We think they're going to hold it there for the rest of the year. Okay. That's going to be the grind of how long they hold these rates higher. That's what we're going to have to work through.
Natalie Picha:So let, let's talk a little bit about treasury yields, which I know we've done in the past, but I think it's always a good reminder. And, quite honestly, it's good for me to talk it out too when we talk about the yield curve, you know, inverting and predicting whether or not there's going to be a recession and are already in a recession, the two versus the 10? Do you mind giving us a quick one-on-one on that again?
Glenn Royal:Yeah. So, um, the yield curve is just a, it's a graphical plot of short maturities three-month treasury bills out to 30-year treasuries. And typically, as you would expect, the longer the maturity, the more yield I would expect as an investor. So that yield curve has that positive slope, right? That we normally see. What happens when economies slow down recessions is you start to see that the yield curve starts to shift where longer rates tend to drop down lower and sh higher, shorter maturities because the Fed is raising rates. Yep. They're pushing on it pushes that end into the yield curve up to where those rates can actually be to your treasuries can pay you more than a 30- year treasury because of the fed's action. Right. And typically, why is the Fed doing that? Because of the inflation. They're trying to slow down an overheated economy. They invert that yield curve, and it works. We're a little muddy in here, though. I, I, you know, I I know we have some deeply inverted yield curves. It's been all over the financial press for the last few months now, a quarter or so, but there are some caveats here. The biggest one is that we're coming off of a monetary experiment of something called quantitative easing that happened after the 2008 financial crisis. And it is; we've talked before about this. I always talk about; I'm pleased with what's happened because it's normalized monetary policy. Right. We talked earlier about the exiting of negative yields around the world. That's what we're seeing. So this is a good sign for us as an investors, but the reset has been painful. Painful. Yeah. And that's, that's a lot of what we were doing. Another thing I want to really stress is that a lot of these potential recessions, or if we have one, are not debatable. They can be driven by two factors. One is the economy. 2008 was a great example. That was an economy, recession, banking, mortgage crisis, etc. This recession is fed induced in order to slow down the economy. I take it; it will be the fed that ends the bear market when they end their hi hiking cycle or the market suspects. They're near the end of it, which might be going on right now.
Natalie Picha:Let's talk about, and Jason's already mentioned this, but let's talk a little bit about has inflation peaked or not peaked<laugh>, you know, Yeah. Davis says it's peaked. Both of them just shrugged their shoulders and looked at me.
Jason Strzyzewski :I mean, as of this year, as of right now, sure. But if we all of a sudden the Fed makes a pivot too quickly, and then there's a different train of thought where if you go into the other side of stimulating the economy again too early, too quickly, say the end of 24, and you don't pause long enough, then who knows. Yeah. Who inflation could peak right Back up. So
Glenn Royal:Arthur Burns was the chair of the Fed in the seventies. Uh, he's, he doesn't have the greatest reputation and part of it, I mean the guy, you know, obviously he was brilliant to be fed chair, of course, but he got caught in a, in inflationary cycle and this, this is the concern in the market right now. You get caught in an inflationary cycle, and then you start getting pressured because of the job losses and things that are associated with Fed hikes. Right. You get political pressure, which he received back then. Burns ditch here burns. So they started to cut rates too soon mm-hmm.<affirmative> and that it's kind of like a smoldering flame. It just reignited inflation, and that brought Paul Volker to come his chair. Yep. And just jack rates through the roof. That's a little bit of a concern right now in some quarters. I don't know if it's a, you know, how much weight I want to give to that concern. Yeah, yeah. Because the Fed is why we're saying earlier, the fed's going to take rates to five and keep it there for a long time. That's to prevent the reigniting of inflation that the chair burns had. They don't want to repeat burns. Right. They want to repeat Volker.
Jason Strzyzewski :Yep. And I'm, I'm sure many of you have seen many of our listeners a lot of the job cuts, especially in tech; we're seeing that quite a bit in more of the experimental areas of business lines, seeing it in banking as well. But these are areas that are, you know, more cyclical, and this is in line with what we're expecting. If that, you know, started to bleed into other segments that are more consistent with the real economy, then that's more concerning to us. Yeah. But we're, we're not there yet seeing that. Yeah. No,
Glenn Royal:We're not there. I'm not seeing that.
Natalie Picha:So what do you guys fe how do you guys feel, or what are you thinking? And I'm, I'm, again, there's just a lot of information out there right now that's, that's really the opposite viewpoint. It's just a mixed bag for where we're going to be at the end of 23. And it's hard to even think about talking about December 23 when we just got through December 22. Yeah. But that's pretty much what we do. But in January, we start trying to predict the entire year. Right. You know, when we don't have enough information. But, where do you see, uh, investor sentiment taking us? Because in basically, you know, we had this massive rally in 21, which really was a result of the retail investor and everybody just piling in and just a wall of money. It was just a wall of money. What do you think about investor sentiment for 23?
Glenn Royal:Actually, I'm really pleased about that because, you know, we're a bit of contrarian. So we came every Tom Dicken Harry was calling for this market to sell off in this first part of this year because of earnings, uh, expectations coming in less than, uh, forecast as well as profit margin compression. Mm-hmm.<affirmative>, those are their two wild cards earnings kick off Friday, and we'll be dealing with the next three weeks. That's what everybody will be focused on right now margins and earnings compression. However, we see earnings actually increase a little bit, but that sentiment was so bearish coming into this year that it creates opportunities like things like this do. So we think for the year, uh, I want to point this out as when the stock market is a component of the leading economic indicators, LEI's, it's six months, the stock market, what we're pricing today is the future. So as we get to the end of the hiking cycles, you can start to see the market, which might be seeing the first part of this year's price at the end of that cycle. So you'll get a lift and markets on that. It's not as strong as when the bull market, and the upside is not as strong as when the fed actually starts cutting rates. That's where we get our juice. So we're at a point where I kind of see the economy repairing. We have focused in the last year on dividend and interest-paying stocks. That pays us a lot of income. We've increased that. I think we talked fourfold or so. Yeah. Right. That's carrying us through this year. I would rather be long the market; if I have cash in here, I will start trying to accumulate positions. We may have seen the lows last October. They may have already baked in.
Jason Strzyzewski :We're still at attractive valuations if you have, you know, that extra cash on the side to start putting to work. But really, like Glenn was talking about the earnings story, that's ultra important. And the funny thing is, we talk about outlooks. Everyone was neutral. Everyone was expecting no earnings growth. Well, all of a sudden, there's a little bit there, you know, 10% on the year. So
Glenn Royal:That was always a proxy too. If we got a forecast if we're in the forecasting game, what's your expectation of, of returns on the market? What's the earnings growth of the s and p? That's my quick, you know, rule of thumb. Yeah. That's what I expect from the market. I'm showing 10% now, and what this all means to me is that will the Fed be successful at what we call a soft landing of the economy? I kind of think of Captain Scully landing that in the Hudson River, that plane, that's the challenge the Fed has, is they have to be Captain Scully in here, and it's very, very difficult. But that's one of the things we're going to be dealing with. And what does that mean, a soft landing? It means we don't have big unemployment; we don't lose a lot of jobs as the feds raise rates. Jobs have been holding in the unemployment rate; I think still 3.8. Yeah. It's still doing quite well. It is quite possible. We have a soft landing, and they're able to engineer it.
Jason Strzyzewski :I and many others were quite doubtful several quarters ago, but with this strong economy, uh, it's given us a lot more confidence. Yeah, with, uh, with the room that the Fed has to run with. So another thing I'd like to talk about in part is also moving the portfolio to more value-oriented companies to kind of carry us through this year. Yeah. With the volatility, we don't see that going away just yet. No. Not at all. But in addition, we are, we're starting to see some very attractive opportunities internationally. Yes. For a number of reasons. Like we talked about, too, with the energy, uh, situation going on in Europe, but also from a strict fundamental standpoint. There are a couple of opportunities that we've, uh, taken advantage of over Asia. Those kind of areas where they rip the bandaid off. China ripped the bandaid off covid zero, and their reopening is much stronger than anyone anticipated. You know, this is their PE multiple of this certain basket emerging around 11, and that's very attractive to us versus an s and p that's still around 20. That being said, there's relative value outside of domestic equity.
Glenn Royal:We have focused on, you know, two years ago when everything was blowing and going, there's a trade called momentum. That's a factor. And, really, you want to ride price momentum, which tended to be the big earning big tech gap stocks. Right. When you have a higher capital cost structure, 5% fed funds, Yeah.
Natalie Picha:Versus zero.
Glenn Royal:Yes. If you're a growing tech company, all you know is growth mode., you don't know how to cut spinning, you don't know how to do that. So that, that group is going through a lot of painful cuts and Right. Labor and all that they'd overhired, et cetera.
Natalie Picha:One thing I'll point out about some of the changes in the portfolio, and it's something that we mentioned, I don't know, several back when we talked about the revenge of the old economy. Right? Right. Yeah. So it's that shift away from those growth, growth, and momentum stocks you're talking about. Going back to...
Glenn Royal:Yeah. Valuations matter. So that's one of the reasons we led international is we saw that the value on a price-earnings, multiple other characteristics were cheap. The third thing about China, we can debate all you want about issues that China has. There's no question about it. The US has issues; everyone has them. But what China's doing, and I want to remind folks that when Covid hit, the reason we rallied so hard was the Fed and the federal government came in with stimulus programs, right? Cut rates, et cetera. Boom. Whenever that money flows in, it lists assets. That's what's happening in China right now. Now they're addressing their property markets. Re-engaging some of the companies we have, they're investing in, uh, commodities, metals, things of that nature are really lifting right now. The China story. So you can, you know, we can debate the merits of China and all that, but you can't debate the money flow that's coming in.
Jason Strzyzewski :Exactly what it does, assets not only that, you know, dollar strength, you know we saw the peaks, so now it's starting a week that bodes well for international trade.
Glenn Royal:It does. Weaker dollar. All that stuff's coming into play. So we've shifted the portfolio, and we're not classic asset allocators and the O BBS and Markowitz model tactical allocators. So we've been out of international. I've tried to go in that market, and I've had a little bit of issues, but I think now's more, you'll see more of that go, you're seeing it in, in precious metals like gold. And that's simply gold at nine-month highs because of the weakening dollar. It doesn't have that competition. The also other thing something like gold has competition with is treasuries. If I'm getting paid 5%, gold doesn't pay me bupkis.
Natalie Picha:Absolutely.
Glenn Royal:Right. I mean, not a thing.
Natalie Picha:That's right.
Glenn Royal:I'd rather have five in a hand than I would, you know...
Natalie Picha:Exactly.
Glenn Royal:...something that someone steals from me, and I
Natalie Picha:Well, and I think what you're, you're really touching on, and it's something, again, we say it all the time, and I hate to kind of repeat ourselves, but ultimately we're fundamental investors. We're looking at the underlying math behind all of these things. Making these decisions.
Glenn Royal:We're making macro allocators too.
Natalie Picha:Momentum, like you said, is that momentum trade, that wall of money—growth, growth, growth. You have to know what you own.
Glenn Royal:You do. You know, what happens, too, is now or never, but stock picking is back in vogue because of the valuations with these higher capital costs. Yeah. So that's an area in the portfolio where you're seeing more active; we believe in a semi-efficient market and all that. We, but we also understand people are human, and they get fearful, and greedy and react to that. Right. We try to take advantage of that, but I'm optimistic about the year. I think I'm probably in the camp. It's a single-digit type return here. Now I say that and then, you know, last year we were talking and two months later, Ukrainian war. So you there's black swan events out there that we can't really forecast. Sure. But what we know today, ceteris peribus, I think it's the economics term as things are today. We've got a fed that's kind of starting to see the end game. We've got corporate profits that are doing decent. I've got very attractive yields in the fixed income space that, oh, 60-40 is back in vogue. Things look pretty good for us.
Natalie Picha:So, I'll throw in another little bit of the uncertainty. Politics is definitely one of those things. Global politics is something we cannot control or have, you know, really have no crystal ball on at all. But something that you've pointed out around here, you know, for the U. S. particularly, is the debt ceiling. And that battle that we may be looking at, you know, mid-year.
Glenn Royal:Thanks for bringing that up, Natalie.
Natalie Picha:Sorry, I'm sorry. I just felt like it, you know, we needed to mention it, but we still have the Russian-Ukrainian war going on. Believe it or not. I think people are actually not listening to that as much as they were. Right. Um, it's
Glenn Royal:Getting off the front page.
Natalie Picha:Yeah. It's getting off the front page. But it is still there. And then, of course, we had the debt ceiling and what's been going on just with, you know, the speaker of the house battle.
Glenn Royal:Yeah. That makes you kind of; that's a prequel, right? To what will happen over the, you know, the debt ceiling. Uh, and that's going to happen this summer. It may come quicker than we think. I saw that some of the recent bill auctions came in larger than we had anticipated as analysts. So the government's rapidly going to hit that debt ceiling. The group coming into power within the Republican party are deficit hawks. And so you'll see a lot of backroom trading on deals. And I am concerned that we could see another government shutdown as we had in 2011. because the inability to do that now you have to pay your bills. We have constitutional cash. Right. And what we're really talking about is where the deficits of hawks are not a bad thing to have them around as these interest rates go up and the government has to pay more interest. You know, if we think of the budget pie that the government deals with every year, there's been a narrowing slice for interest expense just like your home.
Natalie Picha:Exactly. Right.
Glenn Royal:Yep. That now is growing. So what gets crowded out? Is it military spending defense? Probably not. It's entitlement programs.. So that's going to be the big fight. It's not a bad thing to have deficit hawks. It's, it's a good thing. I don't think we're in a situation yet where we saw like in the UK, but that's going to be the political drama that comes into the markets this year.
Natalie Picha:I think, just to wrap it all up again, I'm going to be a bit of an optimist here. There can't be any way we could ride a more up-and-down rollercoaster as we did in 22. I'm hoping for a smoother 23, but there's still a lot to look out for in 23. It sounds
Glenn Royal:Like There is. And you know, you have us here, Royal Harbor Partners focusing on this every day. We live, eat and breathe it, you know, and this, you know, we're working for you.
Natalie Picha:Well, happy New Year to our followers. Thank you for listening to our RHP Market Talk as we kick off this 2023. I just want to let you all know out there that RHP is growing. We're being given the opportunity to help more families; more business owners navigate their investment journey. And then, for all of you out there, it's really thanks to you. We'll be adding some new team members this year; our website's getting a facelift. Be on the lookout for more communications from RHP on all the new things to come in 23. Check us out on Facebook and LinkedIn. If you have any questions or you'd like to discuss today's topics, please feel free to contact us through our website@royalharborpartners.com. At RHP, we're passionate about planning for your financial future. Through our one-on-one conversations, we can help you navigate your personal wealth management and investment journey. How different will your life look with the right advice? Thank you both to Jason and Glenn for joining me today and having this great conversation about markets.
Jason Strzyzewski :Thanks, Natalie.
Glenn Royal:Thank you. Appreciate you, Natalie.
Natalie Picha:All right.
Disclosure:Royal Harbor Partners is a registered investment adviser, and the opinions expressed by Royal Harbor Partners on this show are their own. Registration as 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. The 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. The 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.