RHP Market Talk
Complicated economic topics distilled into digestible and palatable investing principles.
Hosted by Natalie Picha, Partner and CXO of RHP Wealth Management.
RHP Market Talk
Edging Towards a Soft Landing.
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The markets have started much more robust than anyone expected. What is behind this early market rally, and will it last?
What moves does the fed have planned next, and does that balloon matter all that much?
RHP Partners Natalie Picha, Glenn Royal, and Investment Analyst Jason Strzyzewski break down all the recent market news for you in this new podcast.
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Introduction
Natalie PichaWelcome to the RHP Market Talk podcast, episode number 27, 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 RoyalAnd I'm Glenn Royal, the founding partner.
Jason StrzyzewskiAnd I'm Jason Strzyzewski, Investment Analyst.
Natalie PichaWell, here we are again, guys. Thank you for being here and kicking off another really interesting conversation for our February podcast. I'm just going to start us out with a topic I'm going to throw out there—irrational exuberance.
Glenn RoyalYou're channeling Alan Greenspan.
Natalie PichaThere
A Fundamental Disconnect
Natalie Pichaseems to be a little bit of a disconnect between the fundamentals of this market and what we're actually seeing. I think we've started this year out much stronger than anyone expected. We were kind of thinking of a second-half story, and here we are in the middle of a rally.
Glenn RoyalYeah. I think a lot of what we've seen this year, mainly the rallies in the non-earning tech. The meme stocks. Kind of a redo of what we saw after the post covid period, where the meme stocks really rallied against the Wall Street professionals, and yeah that back and forth. And retail crushed the short sellers. A little bit of what's going on, but I think it's really a reflection of how poor the investor sentiment was at the end of the year. Had a bad year. A lot of tax loss selling. A lot of these stocks were down 70 to 90%. And so you get a calendar turn that starts the clock over. And then you just had a momentum-based trade. People tried to come in and bottom fish it, and then the momentum built, and off we went.
Natalie PichaSo
Edging Toward That Soft Landing
Natalie Pichaa little bit of thinking, you know, I'm just so done with the negativity of '22. Absolutely. We're in a new year; let's get something started.
Jason StrzyzewskiYeah. Just taking that washout, turning over the page, and bringing it into this year. And, you know, another part of that, too, is a lot of the economic data that's come out this year so far, has come in a lot better than anticipated. So everyone was, are we in a recession? Are we going there? And still is a concern, but right now, the economy is still very, very strong .
Glenn RoyalEdging towards that soft landing.
Jason StrzyzewskiYeah. Yeah. That's now in the discussion. In the cards. But really a big short squeeze in a lot of these meme names and really likened back to 2021, where you just see all the retail traders piling into these crazy stocks, and you're seeing it happen now on no news. Little to no justification. So the thing that perplexes me and many others on the street, is the cost of capital . You know, where the fed just hiked to 4.75.
Natalie PichaIt was more expensive.
Jason StrzyzewskiWe're now...we went from we came in with another 25 basis points on February 1st, taking us to 4.75, you know. Versus zero interest rate policy where free money. Money supply, that was, you know, conducive of the time. It's not there right now.
Glenn RoyalYeah . And the other thing we're seeing is with the commitment to traders and the hedge fund space. Every once in a while, you'll see where they covered their shorts. So they closed those out. Which they did, which had that short squeeze. But they also are not going long and adding to positions. They're just neutralizing their book. Because they don't believe in this rally.
Jason StrzyzewskiWhen you look at fund flows for the year so far, it's not in U. S. Equities; it's everywhere but international. And then obviously a lot of fixed income and then money market funds where you're getting paid to be there, which is what we've seen the whole time. So
Glenn RoyalRisk-adjusted returns favor that.
Jason StrzyzewskiSure.
Natalie PichaSo do you think a soft landing's already priced into the markets?
Jason StrzyzewskiAbsolutely. Yeah . Oh yeah.
Glenn RoyalBig time. Everything is.
The Other Direction
Natalie PichaWhat if we go in the other direction?
Glenn RoyalWell, we would have more downside. If that were to occur.
Jason StrzyzewskiYeah. Quite a bit. So , you know, Powell came out, we had , we had a huge week last week on January 30th where we had several speaking engagements. A lot of important economic data, and then most of S&P earnings releases, you had big names. Big tech names coming out. The big three, in particular, they all missed. And even so, you had a pretty positive reaction a couple of days following that. And that kind of shows again to that washout of sentiment where people were pouring back into this momentum trade. But the thing that kind of concerns us a little bit, you know, going forward, is we talked about how things would look uglier in the first half of the year and then get better. Well , we've kind of flipped. And the funny thing is, too, I'll take a side note. The first half of the year, it's been one month. And we've already rallied this much. So, you know, we have 11 months left in the year —plenty to room, plenty of room to go, plenty of wood to chop. And, you know, looking at earnings, Glenn, you know , came in. Okay. So so. I mean, nothing, no real big standouts from what I'm seeing . But the concern, which what I'm going back to, is we still have margin compression. Expectations for the rest of the year. Earnings per share are still going to go down, and on top of that, tightening financial conditions. So, the macro outlook is not in favor of equities.
Natalie PichaAnd
Antitrust and The Markets
Natalie Pichawe're seeing a lot of this...this runs up again in the technology space. And I just noted a headline about, you know, we're still talking about some antitrust legislation here in that space. Do you think that's going to have any bearing?
Jason StrzyzewskiYeah.
Glenn RoyalYeah. Oh yeah. It will. And , that thing about antitrust is it's a long process. Yeah . I go back to Microsoft and the early eighties when they embedded their software and all things PC. Bill Gates, you know, went in front of congress, went down with his hubris that he was going to win this thing. Congress put him in his place, and Microsoft was forced to change how they operated its business. Google is at risk. A number of the big tech stocks right now, but it does take a long time before it hits. Uh, you can't see the stocks do well in the short run over several years. But once that starts to take bite, you kind of want to avoid it. One thing, too, about these conditions, these financial conditions that Jason hit on is Chairman Powell is a devotee of Paul Volker . And so the last time we had the inflationary spike , you know, Volker raised rates incredibly high. We, you know, most people know about that. But what he would always do, his mantra was keeping at it. It was a title of his the memoir was keeping at it . Powell, when he first was at the Fed, offered to buy 500 books for all the members of the Fed to read that. So he is going to keep at it, which means keeping rates higher for longer, until inflation does cool down. He has changed his tone with the market. Last year, he was much more kind of hawkish on the market. Now he's gone neutral because he's going to let the market figure it out on its own. They're not here to save the market.
Natalie PichaDo you think he can go to 6%? I'm seeing a few...
Glenn RoyalI think its possible. There are some bets that are starting to occur in the market—used car prices; you picked up on that yesterday.
The CPI Announcement
Jason StrzyzewskiYeah. You know, we're, we've talked about how the move from 9.1 to where we are now, six and a half , that was a little bit easier when we go from zero to four, four and a half where we were. But now that next move down from six to four to two, that's going to be the real challenge, and that's going to show if the economy truly is strong enough to make that happen , and now use car price like Glenn is talking about, we got CPI coming out next week on February 14th, and that's anticipated to go down to, that's anticipated to drop from 6.5%, 6.2. There's a little bit of concern with used car prices coming up again. Looking at Manheim used car auctions, their data starting to come up again in the , in the month of January. So that's a concern as used cars .
Glenn RoyalSo you could have a surprise to the upside on CPI and this next print. Which wouldn't be market-friendly at all.
Natalie PichaNo.
Glenn RoyalOne thing too, I looked at, and this goes back to this turn of this year and what we're seeing, and it relates to CPI. We've done a study ; we're going back a hundred years whenever CPI declines through 7.1%, which we did on the last print. Down to that six and a half handle, we've had seven events where that's occurred in the last 100 years. In six of those events, the market's average return in the next 12 months was 13%. We've only had one year where it was flat; it was actually down 0.13%. So I don't know what the setup this year is, but the odds are favoring once you start to get that turned down in inflation. You know, markets have a positive forward outlook. So I think that's also feeding heavily into this market rally.
Natalie PichaHow
The Payrolls Report
Natalie Pichadoes the surprise payroll report kind of figure into that? It's because that's part of the story.
Jason StrzyzewskiIt's funny you bring that up cause I was going to just touch on it, but we had payrolls come in at 517,000 versus the anticipated 188,000. A big miss from an economist's standpoint. And we had the unemployment rate dropping. Not going up, which essentially is what what is trying to be done here. Went down to the lowest level since May of 1969. So when we talk about the conditions that look a little bit better for the Fed to go higher. Longer, these are the conditions we're seeing.
Glenn RoyalAnd what's interesting, too, is if we want to tie in the labor force participation rate. Right now, the labor participation rate is 62.4%. If I go back to prior to the pandemic. That was a full percentage point higher. So a lot of that we saw a lot of people leave the workforce. Particularly boomers that are near retirement age, at which, by the way, we've got another year, and next year be the last year that boomers hit 60. So huge growth in the aging of America right now. And that's a large part of the withdrawal and the , and the labor force. So that feeds into why companies are hanging onto labor, paying the wages that they are , which are still below inflation. And we still had that paradigm, which feeds back into my greatest wealth creation... the equity markets; I'm not getting it for payroll. I have to get it elsewhere. And that's people flock to the stock market.
Natalie PichaRight. So I think, again, just trying to wrap this up in terms of what the Fed is going to do next. We're getting another 25 basis point hike in March, March 22nd, and probably another 25 basis points in May. It sounds like Fed Powell saying absolutely no cuts in 2023; there is potential to go to 6%. Has inflation peaked? Have we have the , has the job been done? And now how, you know, how much, how much of this is that lag effect?
Glenn RoyalOur history of this , we've talked about this before, is when Arthur Burns was chairman in the seventies, inflation came down, they raised rates to fight, they were doing our thing, inflation came down, they started getting pressure about the unemployment rate and the different things that were going up as a result of that. So they started to lower rates. And inflation reignited. It was like a smoldering ember. Boom. And that's the danger we have is that , and that's what the Fed clearly wants to avoid. They don't want to see inflation reignite . Switch feeds into keeping the Fed funds rate high for a long, which is the capital cost . You know, if I get five, five and a quarter, even five and a half on Fed funds that bleeds through to these corporations. You know, you see the layoffs in the big tech companies; they're basically just cutting off the fat from what they did on the pandemic hiring. They haven't cut in any muscle or anything like that. That'll be the next shoe to drop if we start getting that. You start seeing unemployment increase slightly. I don't know if you can get to 5% unemployment, but at 3.6, could you see it get up to four? Absolutely.
A Flat Market for 2023
Natalie PichaAnd so while we're fighting inflation and this interest rate's going up, you have to see the silver lining, which is if you're a saver and you've been getting zero.
Glenn RoyalAbsolutely.
Natalie PichaSo you're saving money market, you're earning something now.
Glenn RoyalIt is your best opportunity,
Natalie PichaAnd I think we touched on this last time; the balanced portfolio starts to look a lot more attractive. That fixed income piece. Or the bond portion of that portfolio is earning something now.
Glenn RoyalWe still kind of look for this market to be flat for the year. Roughly end the year at 4,000, because of the decline in earnings that we expect in the second, third...first, and second quarters of this year. We're dealing with last year's earnings. That drag is going to be something that the market's going to have to address. And you know, we were looking at earnings , y ou k now, J ason, o n t hat earlier, I'm looking, for second-quarter earnings, first quarter to be a decline of 3%. Second quarter to be a decline about 5.4%. Then it starts to the bottom out. And that's the growth. We start to see growth recovery in the economy i n the second half of this year. The big surprise, I believe, will be how long will the fed hold rates high. And what is the impact of that on the cost o f c arry i n the m arkets.
Geopolitical Threats
Natalie PichaSo , I hate to even bring this up. But it is definitely something that has to be discussed. And as part of what affects the markets. Is the current geopolitical threats that we're looking at. I mean, we've certainly been talking about Ukraine, but we've also now got the debt ceiling thrown in there. Now we've got this balloon. Yeah. Balloon, whatever it is. That was totally unexpected. Right. So heightened tensions again with China. What do you think?
Glenn RoyalYou know. So, you know the ultimate end consequence of that is I'm driving in, and I'm listening to the terrible earthquake news out of Turkey and Syria. And their market was down, what , 30%. It just got crushed on that. So if we get into some type of destructive...think about Taiwan. Taiwan Semiconductor manufacturing corporation, which is the key , manufacturer for both China and the United States. If something were to happen there, this market would get hammered as bad as what we're seeing in Turkey. So, that's a real fear .
Natalie PichaThat's a real risk.
Glenn RoyalBut we've always lived with these as long as I can remember; one of my best trades ever was the Gulf War building up to the Gulf War, which we haven't done in , you know, anything like that. A little bit of a Grenada. But Vietnam was the last big conflict. The market sold off greatly as the sabres were rattling. The night aircraft sorties started going through, and I invested a considerable amount of money that night. That was the bottom of the market. There wasn't an impact on the U. S. Economy because of what was happening around the world. So that's wars tend to create some opportunities because of the fear surrounding them. But it doesn't have an economic impact on what's happening locally in the economy. Unless...
Natalie PichaAnd we'll still have the debt
Glenn Royal... a new type of warfare.
Natalie PichaYeah , of course. And we'll still have the debt ceiling to consider come this summer.
Glenn RoyalYeah. That was discussed last night in the State of the Union. There's a lot of jaw boning. Yellen's out... Treasury Secretary Janet Yellen's out on that all the time. It would be shocking if they don't come to some court of agreement, but it's not that there won't be some political theater as we get close to that.
Natalie PichaWhich always causes some additional volatility. And
The Energy Sector
Natalie Pichathen I would be remiss if I didn't at least ask you guys and, and kind of touch on the energy sector. Obviously, we're in the Gulf Coast of Houston. So petrochem. Oil prices. And all of that matter a lot around here. It's a lot of topics of discussion. What are your thoughts around that sector right now?
Glenn RoyalYou know, the main energy nat gas , crude, that seems to be fine. You still have that destruction in production. We don't have the production...oil and gas like we used to have. The policies that the federal government aren't in place to encourage that. There was even some talk about that last night addressing that. So I think energy as a whole has a bid where we get a little bit more issues as we go down the chain to petrochem, specialty chemicals, that sort of thing, where those margins have a chance of being compressed. At the end of the day, this is all about earnings and margins, and if they get compressed, then you would expect those prices to go down. Hide into the broader economy.
Natalie PichaSo
The Crystal Ball
Natalie PichaI think, Jason, you made a very good point earlier. We're talking about 2023 as if we're already six to nine months in. And we're literally five weeks. Five weeks in. If you had a crystal ball, and I know that we don't. What would you think about at least getting us through the summer?
Jason StrzyzewskiWell, like me and every other savvy investor, if I had a crystal ball, I'd be on an island or something. I mean, it's the fools game to guess at this point. Just with all the developments that we've seen and the speed of things, you know , occurring as well. You've got options playing a huge part in markets as well. You know, we talked about the short covering, but the options , single day expiration. You know, calls and puts on the single indices, that blurs up the picture a little bit as well when you have big speaking events. But as far as this year, I like the call of a flat year. 4,000 price target with keeping in mind all of these margin compressions coming into play. The companies slow down. The general economy, slow down as well. But as we've seen, you know, early this year with the sentiment, everything building, there's a lot of trading around the thought of a fed pivot. And quote- unquote pivot the market. Treating a pause as a pivot, which we all know is not a real pivot. There could be a little bit of that towards the end of the cycle. But we don't know where the hiking will stop and when the pausing will stop. So it is a big question mark right now.
Glenn RoyalIt gets us to where we're positioned, which is where we've been, you know , we haven't changed because of this rally. But that's getting dividends. Interest income. Increases the duration in our fixed-income portfolios, getting four 5% yields. And increasing dividend-paying equities in our equity part of the portfolio. So we're pretty much staying the course until we can get through this period of uncertainty. It's always about earnings. Which is really always about inflation ; the two go hand in hand . And that starts to look better in the second half of the year. That's and then next year looks pretty good.
Jason StrzyzewskiYeah . I will say 2024 looks much better. Coming from an earnings standpoint. Once we can get through this and hopefully get some cuts later into '24, whatever that looks like.
Glenn RoyalWell, think about why the Fed would cut? Because the economy's slowing down.
Natalie PichaRight? Because Yeah .
Glenn RoyalYeah . So you kind of have to get through that period. Now the market's always leading. It's six months I've had of itself. Right . So historically, we've talked about this before, but you do see markets lift when it anticipates the feds are going to finalize that terminal rate we call it. But the real juice comes when they actually start cutting.
Natalie PichaYeah. Well, guys, thank you so much for getting together again. And for always having an interesting conversation. I hope for all of our listeners that each time we get together and have this conversation, we are adding a little bit more information to what you're hearing. And the purpose of these podcasts is to try and cut down on all the noise. And give you the, high points and what we're seeing in the markets. So thank you to our listeners for subscribing to the RHP Market Talk podcast. Please follow us on LinkedIn and Facebook. If you have any 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. 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?
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Disclosure
DisclosurePartners 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.
