What a year it was for the markets in 2023! So unpredictable. Even the Wall Street experts have been humbled.
Looking back at 2023, Natalie Picha and Glenn Royal, CFP®, discuss the fed's dramatic rate hiking cycle and whether it is time to start rate cuts. Someone made money this year...who was it? Around the corner is The January Effect and an election year.
Both Glenn and Natalie can't wait to hear where this discussion goes.
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 a year it was for the markets in 2023! So unpredictable. Even the Wall Street experts have been humbled.
Looking back at 2023, Natalie Picha and Glenn Royal, CFP®, discuss the fed's dramatic rate hiking cycle and whether it is time to start rate cuts. Someone made money this year...who was it? Around the corner is The January Effect and an election year.
Both Glenn and Natalie can't wait to hear where this discussion goes.
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 RHP Market Talk , Episode number 35, produced by RHP Wealth Management, an independent financial services and investment advisory firm based in Houston, Texas. I'm Natalie Picha, Chief Experience Officer joined today by our Chief Investment Officer, Glenn Royal.
Glenn Royal:Hi, Natalie. Glad to be here.
Natalie Picha:Glad to be back in our normal...our kind of our normal...market conversations. Just the two of us. And we are talking a little bit about what 2023 looked like and setting the stage for 2024.
Glenn Royal:I can't wait to hear this conversation.
Natalie Picha:For our listeners out there. We do prep for these things, but we never quite know where the conversation might go. So I think to Glenn's point, I'm always interested to listen...just like everybody else out there. How did that turn out? Let's hear. Let's hear what we might have to say. I think everybody is kind of scratching their head and looking back about just 2023 in general and what we thought we were going to have coming off of 2022, we're still kind of, I think we're still sort of reeling from post-pandemic, you know, stuff. And I saw this really cool headline that Bloomberg put out this last week about Wall Street being humble. Right. That market will humble you.
Glenn Royal:It's pretty hard to humble Wall Street, too. That's true. It's pretty big egos. Uh, yeah...it was actually; I saw a stat yesterday that showed, going back to the turn of the century, every year, all the strategists across the board have forecasted market gains. And they're generally right. We had the gains. But this year was the first year that every market strategist was wrong. They all called for a recession, in '23. And if you recall, we went into January, and I can...you know, I still remember quite clearly. I got the scars. I remember it . But it was all about recession. We were fearful of a recession. And so we had bond yields actually decline . The stock market went up. Prices...you know, went up on bonds. Then we flipped to February due to inflation fears, and the bond market came crashing down, and that affected stocks. And then we went into March, which w as the banking crisis.
Natalie Picha:Oh, that's...you know what? I'm glad you brought that up. I've already forgotten about that. Yeah .
Glenn Royal:A lot happened this year.
Natalie Picha:There's been so much in the headlines and so much up and down. That we've been hit...I think we came out of the COVID crisis afraid of whats the next shoe that would drop. And then we got a shoe. And then another shoe. And so the whole thing...you really did...it was like the sky is falling once the next piece...
Glenn Royal:Yeah. It felt that way. And certainly coming into this year. It did. And, and that's typical, you know, of course, we always, you know, we're always talking about the two emotions markets drive on fear and greed. That's right. So we were full of fear coming into this year . Uh, and that actually probably set the stage up for a good year. What was the big surprise, of course, was that after all this blowup in the spring. That we went through the first quarter, something called AI caught our attention. Artificial intelligence. And that created a little mini boom that went through the summer. Until we got fearful about yields again. And the bond markets started going up, and inflation and the Fed were not through their hiking cycle. Then we went until that all reversed again in November. So, basically, what you're hearing is... what we're describing is an extraordinary amount of volatility that's coming in the market. And that's more emblematic, I think, of a rising rate environment. Now we're kind of on the backside of that. So I feel better about '24 as we're on the downside of rates, and no longer is the Fed raising. They're now cutting rates. The volatility tends to come a little bit out of the market there .
Natalie Picha:Right. The moral of this story is predicting markets is pretty close to impossible. You just never know.
Glenn Royal:You know it is. With you know with consistency. You may be good every once in a while. You know...we all have good calls, but it's very, very difficult to do on a consistent basis. Which argues it back to investing for the long run. Right. And , you know...checking your asset allocations. Staying true to your financial plan. That sort of thing that we espouse all the time here.
Natalie Picha:So, you know, all the way through '23, we've still been...we've been in a rate hiking cycle. As you mentioned. We're all pretty confident in what we're hearing that we're done. No more rate hikes. Now the market's starting to price in...cuts.
Glenn Royal:Cuts. Yeah. So, and a lot of that is based on inflation. I mean it's, it's really kind of here today; all the news cycle is Goldilocks. I mean , we just printed the revision for the third quarter GDP came out, in the first revision, it was 5.2%. That's the highest quarterly growth in 40 years. At the same time, I don't have big job losses in this economy. People are hanging in there . We're not giving...you know, the unemployment rate's still historically low. A little bit of a backup. But not much. So these forces are combining to really cause a little bit of confusion in the market. Because I've got...it's giving some indication that the economy is still too strong. And that's why the Fed has to raise rates. T he fear of this inflation. Right. Again, we've got a Fed that's fighting t hat goes back to the seventies. When t hat... Then fed under c hair Arthur Burns, you know, did the same thing. They r aised rates to fight inflation. A nd when things looked like they were cooling down, they came in early a nd cut r ates. Well, that ignited inflation much like a flame reignites, r ight? Boom. Inflation went again. That brought in Paul Volcker, who killed inflation w ith super, super high rates. Chair Powell does not w ant t o repeat an Arthur Burns fed. So he is very, very forceful in h is statements of that.
Natalie Picha:Aggressive.
Glenn Royal:Yeah. But what we are seeing is that rates will stay higher for longer. The Fed, in all likelihood, has paused. A year ago, last summer, CPI was printing 9%. down three and a half points to 3.6. We're looking for a CPI to come in next year. Even fall further down to that 2% target the Fed's looking for. That's all very...that bodes well for bonds. And risk assets in general.
Natalie Picha:Do you feel like you know, when we start talking about inflation, do you feel like the average household has felt that decline? I think when we said 9% or 12%, it was like the inflation print numbers were just through the roof. And we felt it at the grocery store. We've seen it. You know, we've seen it at the gas pump that reversal down to 3.6 that you just mentioned. Are we really believing that? Do we still feel it?
Glenn Royal:So, no , we don't. And you make a really good point. Because I'm talking with my academic hat on about inflation. If I talk with my personal shopper hat on? Prices haven't come down. I mean, on average, prices are 20% higher today than they were before the pandemic began. We don't see that coming down. All we're seeing is the rate of growth of inflation, which has got up to 9%, is coming back down to those historically low levels. That's what the fed's trying to get to. That doesn't mean prices are going to go back down to where they were. Grocery prices. You know , auto prices used are we're seeing prices come down, which is driving down that overall inflation rate. We still see that, but I hate to say it, but really, what takes prices down deflation is a recession. And that's Yeah . Not something we really want.
Natalie Picha:Right. We don't want that recession. Well, and with the GDP numbers coming out, I think....can we talk a little bit about where we are with interest rate hikes, earnings growth for the actual companies, and what that looks like with GDP still being high. Overall, the economy's strong, and we were sure that these interest rates, if we are at the terminal rate... If we've , we've ended it. Fed's done.
Glenn Royal:Yep . Five and a half.
Natalie Picha:Right. What does that mean?
Glenn Royal:Well , for GDP , I think...you'll see, and the economists are forecasting lower GDP growth next year, around 2%. Uh, and what we're seeing is a slowing of growth, which I can get into the setup with that. Uh, for next year, we'll see as a result of that. But , that slowing of inflation. The slowing of growth. Is really bringing us back towards a disinflationary environment. And I also see disinflation being imported into our country from China. From Europe, which are actually in recessions, if you will, right now. So their prices are coming down, and we're, you're seeing in oil...oil has come off the b oil. Is trading very, very low from the risk e vent, geopolitical risk of the Hamas Israeli war.
Natalie Picha:Right. Right.
Glenn Royal:It's trading quite low these days. $77...$ 78 a barrel. WTI.
Natalie Picha:So, you mentioned AI a little bit earlier. And again, this market... It's quite an interesting year. Let's talk a little bit about technology and the concentration of what we've seen. Inequities .
Glenn Royal:Where did the money go? Who made the money this year?
Natalie Picha:Exactly .
Glenn Royal:Where does it come from and frankly, I mean, as a PM this is where you want to humility. You want to beat your head against the wall. Because it is very, very difficult when market leadership is contained to just a few stocks. So we can, for example, see that this year they got some stats. This is a little bit old. About a week or so data, but The Magnificent Seven, that's these big tech shots . Apple, Netflix, you know, Amazon, and so forth. Tesla they're up over 70% this year, and they account for 94% of the S&P 500 hundred's returns. If I take a few things and step back and say, Hey, what did small caps do this year? Small caps were down. But we were actually up about 2%. I had a pretty good November. But small caps are heavily weighted towards financials. Which is having problems with commercial real estate. So that's putting a little drag on that area. The only thing that's really worked is been these Magnificent Seven. If I take the Magnificent Seven, and I look at it kind of globally, and I say , okay, the U. S. Has outperformed the rest of the world. Well, why does the US outperform? It comes down to U. S. Tech exceptionalism. Our tech stack is the best in the world. These large companies continue to drive profits. They've got strong-quality balance sheets. They have everything that you could possibly want as an investor to be in. However you are paying for that. They're rich. So you're always running against the fundamental investor in me. How can I pay that much for one of these stocks? Well, the reality is that's what's driving the market. So, if you are listening to the market and you want to be the market, you have to own these stocks. So, we own them in line with the S&P weightings.
Natalie Picha:So let's talk about it because it is the Mag Seven. Because of that, we've got that concentration. But we're getting paid in the bond market now. And we're, you know, overall, what we tell our clients is we talk about their plan. We talk about their goals. And you're investing for the long term . And generally speaking, that's going to be in a balanced portfolio. Right. Which is, it's going to have some stocks. Going to have some bonds. We saw in 2022 a year where both stocks and bonds had a rough year. Right. That was hard. The 60-40 portfolio is a general 60% equity and 40% bonds. Which people think of as a balanced portfolio. The 60 40. Are we back to where that's going to do Well?
Glenn Royal:Yeah, I think so . This year, bonds are basically flat. After earlier sell-offs this year, the rally we've recently had has brought their base. Basically flat. It's extraordinarily unusual to have three years of negative bond returns. It's just... It's never happened before. In markets, whenever I get extremes, that's generally an opportunity. So in this case, an extreme oversold that fear. That's where presents an opportunity. The other thing is that with the Fed changing the direction and now leaning more towards rate cuts as we go forward, that favors bonds. The recent rally we're seeing is that the shorter maturities, the, you know, out to 2, 3, 4 years. Those kinds of bonds are rallying greater in price than the longer bonds. That tells me that we got a little bit of concerns of a slowdown. We need to be careful about that. But I'm not... I'm not necessarily in the recession camp. I have been, but signs are starting to show that it looks pretty good next year. We may not necessarily go into recession. We have to be vigilant about it. The average market declines 18% in a recession. So we want to be very careful of it, but we're not seeing signs that that's going to happen. More of this soft landing that you , you hear so much about . That being said, the returns next year...because we're on the backside of the volatility that the bond market brought , is the sharpest increase in rates by the Fed in 40 years. Right. On the backside of that, I look for lower volatility, but the return expectation for stocks , if we look at the price e arning multiple, which is the barometer o f value. It's running about 20 times right now. In the recent rally we've ha., I think that S&P multiple, given the level of inflation that we have, f air v alues, 19, 18, 20, right. Here is where we are. So, two ways that we make money in stocks are either through earnings growth or multiple expansions. A nd we lose money through multiple contractions or earnings declines. Right. We're set up for that next year where we're going to have earnings growth, 6% for S&P 500 profit estimation after three-quarters of negative earnings growth. We're finally turning positive there. But I don't expect multiple expansions. That's going to be the big deal. So I ki nd of see more of a year where we have earnings per share, estimated growth of about 6%, plus dividends. A couple of points on that. So in that world of 6 0 40, you've got the stock component calming down a l ittle bit, not driving as much as it did this year. But the bond side of it, that's now paying me over 4%. And what we really focus on, an d w e've talked about quite a bit, is t h e r eal yields. And that's what's so important. And that's...that, at the end of the day, that's been the big reset that's happened in t he last few years. The pandemic brought up inflation we hadn't seen in 40 years, and that's caused the Fed to go on this massive hiking cycle. That's increased real yields, which is the return I get in the bond market after subtracting for inflation. Post-financial crisis 2008. We've had negative real de als f o r t he majority of that time. We now have po sitives, but th at's kind of a drag; that's a real resistance that we ha ve t o overcome. That cost of capital. But we're adjusting back at the end of October and were looking at 5% on a 10-year yield. We we re p ointing out that that's the average level of interest rates in this country since Alexander Hamilton.
Natalie Picha:Right
Glenn Royal:...the Treasury Secretary. So I see it simply as this 2008 was a great financial crisis that , uh, global shutdown , it caused the Fed to do things in monetary policy we've never seen. Ben Bernanke was a expert on the Great Depression. World's leading expert. So he enrolled in things like quantitative easing.Tthese different programs where the Fed expanded his balance sheet. That's all being unwound now. We had these high real rates. So I expect, you know, this volatile is 2008 was going in, we had the volatility of the last couple years as we've come out of this. And the Fed's still paring down its balance sheet. They're trying to get back to neutral. 2% at the average inflation target. I think they're going to be successful at that. But a lot of the volatility on the rising rate side of the trade is now behind us, and now we're on the declining side. Which ought to be fair winds. I think the downside's probably limited in our markets, but the upside could be a little capped as we transition to that period when earnings start to take off again, which we look for in the next years.
Natalie Picha:And because we're...because we've actually gotten that rise in interest rates. We've seen a huge influx of money in the market and into money markets. Right. And I think the retail investor needs to be aware that, hey, when they start cutting rates, so those rates go down.
Glenn Royal:It does. So that's the most sensitive part. Exactly. So yeah , we talk about this concept of duration, et cetera, but where the Fed controls the short rates. They don't control the lot . They tried that through quantitative easing and things like that. That was all that controlled ten years and out . But these short rates that are in the fed's control, as fast as you saw them go up, you'll see them come down as the fed starts to drop rates. And that's what we're seeing happening right now. If I get out there ten years and longer, they're staying a little sticky. You know , down from five, you know , four and a quarter . Right. But it still needs to be more sticky compared to what shorter rates are doing. So I would use this as an opportunity that, as we get into the next quarter, to extend your duration. Move out of money market. And start buying bonds, even though two-year treasuries aren't bad. Five-year tenure. It's getting out a little bit on that curve. You don't have to go long. You have to take a lot of great risks. And you're being rewarded where 40% of your portfolios clipping, you know, four to 5% coupons income every year. I couldn't get you that. Remember we used to talk about Tina? Tina is an acronym. There is no alternative to stocks , no alternatives . Stocks . Because bonds didn't pay . Well, now the acronym is Terra . There's a reasonable alternative to stocks, and that's fixed income. So the balanced portfolio of 60 40, to me, was long, you know.. It was cascaded to be dead in the ground. I don't think that's the truth that's coming back, and they'll do quite well in the coming year .
Natalie Picha:So...I know...you've mentioned it now... recession a little bit. We have a couple of terms that we use Santa Claus Rally for the end of 2023. Then, we have the January effect. Like I said, even when we say it's almost impossible to truly predict markets. We still try. That's part of the job. It is to look at the data and really analyze it. And do you see the typical Santa Claus Rally?
Glenn Royal:Seasonality? These are seasonality factors. We've got some big ones coming up. We have the Santa Claus Rally, which is just typically the nature, the market that likes to kind of bid things up towards the end of the year. It's just the way that goes. Right. There's greater value in the January Effect. You know, for those that haven't heard about the January Effect. This year was the greatest example I've seen in a long time. We got at the end of 22, and all those big tech stocks, Tesla was a prime example, down a hundred bucks a share. They had come off so far that you had people doing massive tax loss selling it and through the end of the year. So when January hit. You had the people coming in that knew the tax loss trade . The January effect is the rebound in those stocks that get impacted by tax loss selling. This year...if I had to speculate, you know, put that hat on, right? It's probably going to be in small caps in value stocks and dividend-paying stocks. Let's go back to the beginning of this year. Everybody who's fearful of recession. So they all went parked in dividend growth stocks. Dividend payers. The option premium funds, and all that. They haven't done anything this year. They've actually been declined . Why ? Because they own financials. And real estate. Utilities.
Natalie Picha:Because it's all been in the Mag Seven.
Glenn Royal:All that goes against the rising rate environment. Those things may start to do better coming in the next year as things calm down. The rates go the other way, but it was not in their favor this year..
Natalie Picha:So, the other big topic of 2024 will be the election season.
Glenn Royal:Yeah. That's another seasonal factor. Historically, in the year of an election, whether it's the first or second term, markets are up. And that's simply because they don't want to do anything and to mess up the economy. Right? So markets have historically been up. So that's in our favor of the seasonality of next year. If I look at the S&P 500 that we set was really driven by those Mag Seven, you know , and it's up, you know, 19% for the year. If I look at something like the equal weight S&P 500, that's the more broader market that's up 4% for the year. Our opportunity in the coming year is a more diversified portfolio. A little bit more international because of a weakening dollar. When the Fed raised rates. It makes the dollar stronger. When the Fed lowers rates, the dollar gets weaker. Well, the dollar's a big driver of international performance. So we're seeing it right now as a dollar's week rates come down. Our international component that we have is starting to lift. So I feel good about that. You might get the January effect on those small caps. Value stocks, and dividend payers. But I think next year's more of a year about broader diversification. And even things that have gotten beat up so badly or really not may be done as well. Like gold, it was a surprise it hadn't done as well, given all the geopolitical risks . It's not 10% for the year, but it had competition from a ten-year paying me 5%. Now that I'm seeing that yields come down, you're starting to see gold go up a little bit. So gold and perhaps oil, too, are probably two areas where good, good hedges for next year .
Natalie Picha:I'm cautiously optimistic. Right. I think if we just go back to 2020, I do believe there's some post-pandemic fear that we're still kind of walking around with on a daily basis. The 2008 financial crisis. I think... I saw people still so fearful of that repeat going all the way up until maybe 2015 or 2016. It took that many years. That there's still this sense of the next shoe that could drop. But this year has proven to be an unexpected year. When we were all sure that it was just going to be awful all year long. And here we are.
Glenn Royal:Yeah. It's probably one of the more challenging years that I've had professionally. Everything that you would normally expect. The rule books get torn up and thrown out the window. So you had to listen to what the market was saying. And in this case, the market was seeing the Mag Seven... The Magnificent Seven's a place to be. Those big that have been there year in and year out for the last decade. Our greatest risk, going forward to that, is antitrust. You're seeing in Europe. And you got a case of the first quarter with Google and the U. S. Government. So those are longer times to play out. But they eventually do take those guys down. So that's the risk we have to watch.
Natalie Picha:Well, as always, our conversations are quite interesting. And I'll look forward to hearing what we have to say when this one comes out. Thank you, Glenn, for your thoughts. And thank you to all of our listeners for subscribing to RHP Market Talk . Please follow RHP Wealth Management on LinkedIn and Facebook for additional information. As always, leave us a review, and if you have any questions or would like to discuss today's topics, feel free to contact us through our website@royalharborpartners.com. At RHP we are passionate about igniting change for our clients. We will help you identify what truly matters to you and your family and help you on your journey to making changes in your financial life, with your life goals in mind. Please get in touch with us to begin your transformative journey.
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