What does the rest of the year look like with summer starting and the 4th of July right around the corner?
Natalie Picha, Glenn Royal, CFP® and Jason Strzyzewski cover it all from the debt ceiling, the various types of recession, the health of the U.S. dollar, and the five companies that makeup 24%, a record level, of the S&P 500.
And by the way, this episode was not AI-generated.
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 does the rest of the year look like with summer starting and the 4th of July right around the corner?
Natalie Picha, Glenn Royal, CFP® and Jason Strzyzewski cover it all from the debt ceiling, the various types of recession, the health of the U.S. dollar, and the five companies that makeup 24%, a record level, of the S&P 500.
And by the way, this episode was not AI-generated.
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 31. Recorded here in Houston, Texas, by RHP Wealth Management, an Independent financial services and investment advisory firm. I'm Natalie Picha, founding partner, and I'm joined today by our portfolio manager and founding partner Glenn Royal and our investment analyst, Jason Strzyzewski. Thank you, guys, for joining me again today.
Glenn Royal:Always glad to be here with you, Natalie.
Natalie Picha:Well, it's back to just the three of us. We've had a couple of episodes here back to back where we've had special guests, and so today, we want to really focus in on the markets, talking about what we just got through here with the debt ceiling fight. Glad to see that sort of behind us and kick it off with some conversations around the banking crisis and just where are we right now in the economy. Are we getting ready coming ? The 4th of July is coming up in the second half of the year. What are we going to be looking at for the rest of this year? Let's start with a debt ceiling .
Glenn Royal:Well, thankfully, that's behind us , right? Yeah. We got that resolved. That was one of the ones that, you know, 70% probability was going to get resolved. But that low probability that it wasn't created a lot of consternation and, you know, anxiety that we dealt with the last few weeks. But they really get that through. So the government's going to continue to fund their debt. So no defaults. No risk to the US dollar. No risk to the US economy. We're in a good spot with that.
Natalie Picha:Banking crisis?
Glenn Royal:Yeah, there are too. You know, there's a case, in hindsight, you can see it, but, you know, before it happened, you know, no one knew. But the fact that it was largely contained amongst, you know, the handful of banks. And the response to the FDIC caps and the different things that the treasury did. It basically contained it, and I can tell because I'm watching the KBW bank index, which is a bank basket of bank stocks. They were down 10% year to date going through that period. Now they have completely reversed that and have gains for the year. So
Natalie Picha:So it's interesting that we're talking about, too , really what we consider risk in the market events right there, together in this first half. We came out in the first quarter really strong—kind of a surprise. Starting out in 2023, we kind of expected that pullback and then we had these two big risks on events. Or risk-off events. I'm sorry. And here we are—the second half of the year.
Glenn Royal:So there's an old saw in Wall Street, it's been around forever, that bull markets climb walls of worry. And right now, you have the sentiment in such an extremely bearish setup. Record levels and money market cash. And sure . Jason's looking at these things that, for me, is a contrarian. I like knowing that I have 5 trillion in money market assets and am looking for a return on investment and just waiting for the moment. I see what I see in the bond market. I've seen a number of things. So I think the setup's pretty good for risk assets between now and the end of the year.
Jason Strzyzewski:Yeah, absolutely. That firepower's definitely going to need to find a home. You know, once we get to pausing and cutting eventually with rates and, you know, touching on that might as well. So next week, you know, this week, kind of a little bit of quiet week. With the Fed blackout period, but next week we have CPI reporting on June 13th, and then we have the rate decision on June 14th. So picking up a little bit right back where we were,
Glenn Royal:What do you think they're going to be seeing on that CPI print when they walk in?
Jason Strzyzewski:You know, so we're, we're anticipating. Currently we're at 4.9% CPI year over year . And then the surveys streets are anticipating 4.1. And honestly, you know, all things considered all of the hikes that we've done this year, all of the liquidity that has been completely drained out of the system. Things are pretty good. All in all, you look at the economy, you look at some of the recent economic data. You know, we went from 9.1% on inflation, you know, a little bit more than a year ago in July 22. To now chop that in half. And yeah, we still have some room to go to get to the fed's terminal rate of 2% three; that'll be another discussion. But these are all good things. You know, the economy's staying intact. We've talked about it a lot, and we wouldn't be able to do this if we didn't have the strength behind this.
Glenn Royal:Yeah. And what I see this setup is to Jason's point on the inflation story, you know, there's this thing called the base effect. When we add these numbers, we do month over month and year over year, and the month-of-the-month rates are dropping and they're still positive inflation still here. We all know that. But it's up two- tenths to three-tenths of a percent per month increase. A year ago, we were at 9.1. We're seeing that with just that little smaller increase from the prior year, the overall CPI on the calculations could drop to 3% by the end of this year. Now, where the rubber meets the road and where Wall Street's going to try to figure this out is what is the level of the neutral fed funds rate going to be in the future? Where will the fed take to what we call this our start ? Were they going to take this federal funds rate that's not too hot, not too cold, just enough for the economy? And one thing I think was going to be very, very different is, you know, it was 15 years ago in 2008 and the banking crisis and the Fed had to do extraordinary measures and take interest rates to zero. The Fed's average inflation target was 2%. That's...and no one can give us a good reason why that number was chosen. Yeah, it's an arbitrary number. So that's where I think is going to be happening in the course of the next year is what is that true neutral rate? And it matters because that's going to be probably where the Fed, once they stop raising rates and they start to cut rates, they're not going to go too far below neutral. If I go back to what happened post-2008, the Fed went negative. Federal funds rate negative. Real rates below that neutral rate, right? By 1.5% and kept it there forever. We're going to see what we call these positive real rates, where the federal funds rate is above inflation. Just enough to restore that monetary tool in the fed's kit.
Natalie Picha:The way that we've thought about it is we haven't been in a normal rate or a normal world since 2008. And I say that because even when we were in the Covid crisis, right? ...whatever that was with the markets, a complete unknown 2008 was still hanging in people's memories very, very, very heavily. And truly we're back to that place where, I mean, savers should make some money on their money. Right?
Glenn Royal:Yeah. You get paid on your money markets...
Natalie Picha:Should you get paid on your money
Glenn Royal:Retirees that are depending on CDs and things like that. So
Natalie Picha:So some sort of a normal rate environment. Well , a pre-2008, what that does is it puts a tool back in the fed's toolbox.
Glenn Royal:And in our tool kit is a portfolio manager.
Natalie Picha:Exactly. Yeah , yeah .
Jason Strzyzewski:Higher rates for longer. So next week, we're kind of anticipating the market's pricing a pause and then the following meeting in July, late July, another hike. But that's really kind of murky at this point as hiking cycles towards the end.
Glenn Royal:So I think the Royal Bank of Australia was the first one to announce a pause on their central bank two meetings ago. Based upon future data. Right. And then they've hiked the last two meetings. After saying they're going to pause. So we're at that point where they may talk pause, but they may still put another hike on July or something, but maybe another quarter to half a point. That's about it. If that.
Natalie Picha:You know, for many of our listeners and those, if you are an RHP client, you get to have these conversations with us on a very regular basis. Right? But for those who may not be quite as tuned in, why do we care about that terminal rate? Why does it make that big of a difference? What does it mean for markets overall? And I was just looking at some headlines a few minutes before we walked in here. You know, tech has led this rally this year. And now I'm seeing financials are starting to lead some of these gains. So what does it mean when we talk about this terminal rate and where we are with how it overall affects earnings? For those clients that may not quite grasp exactly why we keep harping on... Oh, where are interest rates going? What does it matter? Yeah . Right.
Jason Strzyzewski:Cut and dry. It's the cost of doing business. So, I mean, it's going to impact everything from. It is the tool to expand and contract the economy and one of the few tools that the Fed has to do so. And that runs the show, that runs equities. That runs fixed income. That's, you know, it's part all be all .
Glenn Royal:So part of your valuation measure. You know, the risk-free rate you tie back into the present value analysis. Because when we're buying companies, we're buying that future stream of earnings., I need to discount that future stream of earnings using this rate to present value. So am I overpaying for this stock? Or underpaying? Is it a deal?
Jason Strzyzewski:Sure. So, it's funny you bring up the tech rally, what started off this year; it's kind of a junk rally. Mean reversion, right. in January and February, a little bit. Well, now, after this most recent earnings period, the FANGS have shown they, and we talked about this last podcast or a couple ago, that they, they showed up, they came, they have the earnings growth expectations, and they're going to continue to come. And a little bit of that with the AI frenzy and everything that comes along with that . But there is something to it. I mean, barriers to entry to get into that kind of technology are extremely steep cost—the cost of it. You need to have the scale to do that. And those names do. So, you know, you look at a return this year, those names the top seven, they're up about 50, 55% versus an s and p a total return. So including dividends paid roughly two, two, and a half . And , uh, equal weight , equal weight equal weighted without those, the overweights to the tech. So, you know, you look at that, and it kind of, it's indicative showing investors they're looking for safety and growth. Yeah. And it's a little bit backward, you know, considering what happened last year. But the price was put in last year for a majority of these companies .
Glenn Royal:Mean reversion.
Jason Strzyzewski:Yeah. Big time
Glenn Royal:With those big taxes. That's.
Jason Strzyzewski:So that's where they're jumping.
Glenn Royal:And I think people are...they're concerned about the narrow breadth leadership of this market. You know, Jason's comment, these top five stocks make up 24% of the S&P 500. That's an all time record level. The last time they were this large, it got up to about 18% of the S&P 500; that was around the.com era. So we are seeing a very narrow market breadth , which is just leaders versus losers.
Jason Strzyzewski:Advances and decliners on the day.
Glenn Royal:Yeah. And , and you're , and to Jason's point about, you know, the broader market up 2%, the S&P up 11, it's because of that heavy tech waiting. But here's what I think is interesting. Whenever we've had five prior periods where I take the S&P 100 compared to the S&P 500, it's the same subset of the 500, just the 100 largest companies. Yeah . Right ? That's where the leadership is. That's outperforming the S&P 500 by about three and a half percentage points right now. We had in the last three months; we haven't seen that. Normally , you don't see that type of narrow leadership market. So you would expect a mean reversion, right? Yes . You would expect something to correct. And that's where I think the press is all the negativity that you're seeing right now about markets. But I want to point out that in these past five prior cycles where we had this dislocation, a small concentration of leadership, the mean reversion was actually the rest of the market melting up to catch up with the tech stocks. So I've got tech stocks up 50%. Sure, I've got a broader market that's up to today. We're seeing banks. , we see value stocks. I'm seeing the Russell 2000, which was kind of flat for the year , up to a half percent. So the rally is starting to broaden out. I think part of that is the negative bias that institutional managers and everybody, every strategist, have on the market. But they're being kind of sucked in that FOMO, that fear of missing out. Right.
Natalie Picha:They have to be there. You can't sit.
Glenn Royal:You had to after a year, like last year. Or if you underperformed and you're , you know, big money manager. This year, if you're underperforming again, which, you know , again, January we were going in a recession, February is all about inflation, and March was a banking crisis. So you have had every reason to want to be on the sidelines, but the market's up 12% in your face . And you've missed that after your life less year . So now you get career risk. Managers are afraid of losing their job, and money starts coming on the sidelines. And I think what's going to feed that is the inflation story that's trending down. Like we talked about. The smaller month-over-month numbers at the same time earnings are hanging in here. I don't see the recession we've been waiting for for six quarters.
Natalie Picha:Now . That was going to be my next question. I don't want to say recession proof is its economy recession-proof, but the recession is looking less and less likely here.
Glenn Royal:Well, there are different varieties of recession. We have what we sometimes we have a rolling recession. So the broader market doesn't go down, but it hits energy more than it hits technology. It hits materials just rolls through the economy. In this case, there was so much money pushed into the system during the pandemic. The records amount of global of currency was pushed into the system. And it has been withdrawn fast. You know , 5% hike last year. But that money is still out there. You still see businesses that are retaining labor. They're trying to grow their labor; they're trying to hang on. They're not cutting to the bone. So the setup is actually pretty good, and I'm quite optimistic on the market. I expect some volatility. We should all expect that. You've had a pretty strong run, or we do for a little correction. Yeah. But one other thing we like to do is, okay, let's play a game. If I do stocks or bonds on the table, which one would you grab? You know.
Jason Strzyzewski:Well, Glenn , with my age, I know what I'm grabbing every day . Right?
Glenn Royal:Yeah. He's going for the long bonds. You know.
Natalie Picha:He's going for the long bond!
Jason Strzyzewski:The triple leveraged equity plan .
Glenn Royal:Yeah. Triple leveraged cash.
Natalie Picha:These are all inside jokes, guys.
Glenn Royal:Yeah. But no, basically, so, and that sets us up too . Not only do I have an equity market that's got a stealth bull market going on underneath this . It's starting to broaden out. I've got inflation coming in and the earnings that we're holding in here. I'm looking at the bond market and seeing rates I hadn't seen in 15 years. That's right . And opportunities. So we have in our portfolios were overweight, fixed income—no surprise there on how we approach things. But what we're starting to do now is within fixed income where we had been treasuries, and then we extended our maturities like last year when rates went up. Now we're starting to put credit risk into the portfolio. So I'm a little high yield. Little things like that not necessarily extending my duration. Because that's something people need to understand, the bond market rates could still stay sticky and high for 20 years, you know ? So I don't have perhaps the reinvestment risk this time around. O r t he last 30 years, w here t hey just kept going down. You h ad to reinvest in l ower rates. But I still, you know, at the margin we've got rich markets, e t c etera. So I don't w ant t o put a lot of what I c all duration. I'm o n a lot of long maturities in the portfolio. I still want to shorten up my maturities. But I'm okay with taking credit risk because the balance sheet of the economy is pretty good.
Natalie Picha:Well, that was going to be my next question is, you know, with higher interest rates, we expected some sort of a credit crunch, and I do know that's out there in some places. But where...
Glenn Royal:Oh yeah. Commercial real estate.
Natalie Picha:Commercial real estate's had a credit crunch for sure.
Glenn Royal:Yeah. So there's part of your rolling recession—theory, in a sense. I mean, commercial real estate's getting crushed. And part of that is just a higher cost of capital. The other thing is we are seeing a pickup in bankruptcies. And so you have to be careful of this. These were companies that were already under-capitalized, and they just had their interest rate expense basically double on them in the last year. They can't; they couldn't afford it before. Now they can't afford it and can't go to the markets for more debt financing. So it's shut down on them. You have to be careful; you have to pick your spots in here. You want to be prudent about it. But opportunity is here in the fixed-income space.
Natalie Picha:And we got weird...I don't want to say weird...but it was an unusual labor market. The payrolls print came out right with the nonfarm payrolls increasing to 339. But we also got an unemployment rate that rose. You have some thoughts on that because, again, it goes back to this kind of crazy place that we are in this market.
Glenn Royal:One thing I want to stress is the consequence of the pandemic. And even our political cycle that's been in the last eight years. Is we don't like to do surveys anymore. People...or they give bad data. Remember how hard the polling was for the election? How Crap.
Natalie Picha:Oh yeah.
Glenn Royal:Because people were giving bad information . Yeah. Purposely give the wrong answer. The amount of people that take the employment surveys today is some of the lowest on record of respondents to these surveys. So we have to be careful with the data. When it gets a little wonky like that, some of it could just be in the nature of the survey itself, but basically companies, I mean, there's been some. Rolling, you know , technology companies have had the biggest layoffs, Right? Sizing their ship. They've largely stopped that, by the way. You don't see people cutting into the fat. They've done some right sizing. Over-hiring during the pandemic. We've corrected that. But all in all, labor seems to be hanging in there . And one of your biggest tells for me is the housing market. The housing staying in there is pretty good. You know, I know we have a shortage. We've got demand; we do have issues with you know, the low rate structure the last decade has got, you know, has created immobility. People aren't moving cause they can't afford to leave their houses, which feeds into higher prices. Because there's no supply, but that's a telltale if I still have a fairly strong housing market that's tied to labor in pretty good shape.
Natalie Picha:Another question that we've got in pretty regularly around here is the strength of the dollar. And you know, I've heard some rumors out there that the dollar's not going to be the global currency anymore.
Glenn Royal:Yeah. There's a lot of that. And, I think it really kicked off even more so with the banking crisis because there was some concern that it was going to weaken the dollar. And we have seen that if you look at the dollars of the world's reserve currency. It's dropped from 70-80 % of reserves down to, you know, mid-fifties. So it's still a very key component, but clearly, you know, the Chinese Yuan's gone up to 7% of world reserves, you know, the Euro 10% or so. We've not seen the wide adoption of a move away from the dollar. And that's simply really because of the strength of our legal system that protects that asset. It goes back to the debt ceiling, which is a greater risk of the dollar. Yes. And we got paid absolutely than the dollar would've got crushed. But because we didn't have a debt ceiling crisis, there's another reason why people feel confident in owning dollars. It still affects a lot of the world's trade. You're still going to see a movement away from the dollar. But it's, it's going to be glacial. It's going to take a very, very long time. I'm not as concerned about it as some of the recent press that we're seeing about it. And then you know , look the other, I'm going to throw this in there a little bit too. I know we have people that watched China very, very closely , on the stage of the global economy. You know , China was supposed to reopen this year, had the big bang effect. It turns out it was just basically that reopening purchase. , I'm going to go buy cosmetics and handbags. Expensive Gucci items, and I'm done . Yeah . You know , I got to get out of the house. And so there was no carryover effect. Global manufacturing from China, which is a deflationary effect.
Jason Strzyzewski:Playing into energy prices big time.
Glenn Royal:Commodities.
Jason Strzyzewski:Yeah. Energy, commodities all good things for the inflation picture. Altogether
Glenn Royal:Yeah. And China's going to have...I mean, it has its issues. We know they have a lot of debt in their government-sponsored enterprises. They have a lot of debt in their provinces. That they're going to have to do it , and they have massive unemployment , 20% unemployment in their youth that are graduating with no jobs. And then you had that one-child policy, which affected the dynamics of that country. Demographically, I've got an aging population depending upon the younger population to take care of them, and the younger ones can't find work. So they're in a tough spot. So don't count on China to lead the global economy. They have to deal with their own issues. Yeah . So does that maybe give a little bit more runway for the US and this, you know, dual-system world? Yes . Certainly, the US has become more of a manufacturing nation. You're seeing that semiconductors, different things. That's probably the underlying trade that you know out there. But it's in my mind as if we're going to a bifurcated global manufacturing system; what side of the trade do I want to be
Natalie Picha:On? Right.
Glenn Royal:Those are bigger-picture stuff. Yeah . Yeah .
Natalie Picha:That's a longer term, too, right? That is going to take some time. We've talked about this in previous podcasts about bringing some of that manufacturing and that chip shortage and all those things back to the US . Why we couldn't just turn that faucet on and make that change, it's, a more complex, It's a hard change—so speaking of that and jumping in a little bit to talk about technology circling back around on AI. And the hype and what we're seeing and how's that going to change the world? I mean, we're it's out there.
Glenn Royal:If I still have a job in two years, let me know. I mean... Who knows? I mean, I saw everyone that, y ou know, thought we had insulated ourselves f rom t hat type of career risk from technology. And copywriters. , They're Losing their jobs to AI copywriting.
Natalie Picha:ChatGPT. Right?
Glenn Royal:Yeah . All that stuff's starting to happen. So I'm, I think it's fascinating that it brought technology comes in these massive ways. First, it was the internet. Or PCs ? But then it was really the internet. Yeah. And then the next big game changer was mobile technology. A nd then I would say the third game c hanger was the cloud. W hen storage. Right. Remember, everybody had to carry all these big drives and all, thank God.
Natalie Picha:Hey Netflix. Difference between going and picking up the red box , that thing, and or actually just, I'll.
Jason Strzyzewski:I'll just Go to the mailbox and... That's Right .
Natalie Picha:Turn the TV. Never Had to go pick it up .
Jason Strzyzewski:No, I think what Glenn's leading to is, you know, with all technological developments, yes, there can be some menial job loss, but really it's just displacement until those new jobs are created. Because at the end of the day, you know, ai, there's a lot of incredible things about it. There are also some questionable things. Something that, you know, our government and other entities need to be on top of. The world . Yeah . Yeah . But all in all, it's a means of productivity. It's an incredibly powerful tool for applications that are almost universal for everything that they're coming out with. So it is exciting. You know , I'll be honest. It is, and you know, as an advisor you say, Hey, you know, you have the fight against indexing. Now you have the fight against ai. I think at the end of the day, there are numerous industries where you need that human element. You need that person to talk to. And that's what we're here for at the End of the day.
Glenn Royal:Use it as a tool instead of a replacement.
Natalie Picha:Right. I was going to say yeah .
Jason Strzyzewski:Siri can only do so much.
Natalie Picha:And if you're questioning whether this is really us. It's really us. We didn't give this to AI. We didn't; we didn't ask anything else to just take our voices and produce this podcast. So y ou, when you t alk to RHP, you really t alk to RHP. It's us. So...
Glenn Royal:It's an exciting area. It's certainly got the mindset. Is it overdone in the short run , man ? Possibly could be. But there are certainly companies we own in the portfolio that are benefactors of ai, and we'll be there for a long time. Yeah .
Natalie Picha:All right, guys, that's, I mean, we covered a lot of ground in a very short period of time. Is there anything else that you'd like to talk about before we close this one out?
Glenn Royal:No, just , you know, I, I think the focus now with the debt ceiling. And the banking crisis behind us will be back to the Fed. So, you know, enjoy your summer, but keep your eyes tuned to Chair Powell and see what he's up to.
Natalie Picha:That's Right. Well, I want to say thank you to our listeners. Thank you, Jason and Glenn as always, for being ready to just jump in on these things. To you, guys that know us well and, you know, are in and out of our office. You know that we're, our heads are in this all the time. We don't prep a whole lot for these podcasts because it's kind of a carryover of the conversations that we're having amongst ourselves. Or with clients. And so anyway, I appreciate you guys being willing to kind of do this. And I don't always tell them what I'm going to ask.
Jason Strzyzewski:I just get an Outlook notification, and then....we're rolling!
Natalie Picha:Here we go.
Jason Strzyzewski:That's how we do it around here.
Natalie Picha:It's how we go. So thank you to our listeners for subscribing to RHP Market Talk. You can also follow us on LinkedIn and Facebook. Please join us for our July edition of Market Talk, where we're going to have a special guest, Vanessa Solis-Medusa, with Waldron and Schneider Law Firm. She's going to be joining us for a very interesting discussion about what you should do before your second marriage and probate nightmares. And so, if you have any questions or you'd like to discuss today's topics, please feel free to contact us through our website, 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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