It's 2024, and a variety of factors are affecting market conditions. Geopolitical tensions, interest rates, the election year, and corporate earnings are just a few.
Are we back to normal? The market has always been subject to fluctuations and volatility, and it is important to keep a level head and not panic.
Natalie Picha, Chief Experience Officer, and Glenn Royal, CFP®, Chief Investment Officer from RHP Wealth Management, discuss the market news and what to look for in 2024.
Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.
Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.
https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530
It's 2024, and a variety of factors are affecting market conditions. Geopolitical tensions, interest rates, the election year, and corporate earnings are just a few.
Are we back to normal? The market has always been subject to fluctuations and volatility, and it is important to keep a level head and not panic.
Natalie Picha, Chief Experience Officer, and Glenn Royal, CFP®, Chief Investment Officer from RHP Wealth Management, discuss the market news and what to look for in 2024.
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 36. 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 . Thank you, Glenn , for joining me.
Glenn Royal:Glad to be here. Natalie, it's always good to see you .
Natalie Picha:It's always a fun conversation.
Glenn Royal:True. You never know where it's going to go.
Natalie Picha:We never know what we're going to get. So just letting our listeners in on behind the scenes. So far, we're known as the one-hit wonder here. Because we, we get it. We basically do it one time, and it's in the can, and we're good to go. This is our first official podcast of 2024. And it's not officially out for the whole public just yet, but we started doing something called , uh, market Minutes. And Glenn is sharing with our clients, at the moment, two to three minutes of a snapshot of what he's seeing in the markets and his thoughts. And it's something we're super excited about. Glenn, how do you feel about how those are going and how the rollout to the public is going to be?
Glenn Royal:You know, I think I have a face for radio when I look at those things. I'm not really that crazy about, you know , being on camera. However, I think the format gives us a chance every month to come out and say...hey, this is what's currently happening in the market. This is what it means, and what is the outlook for the rest of the month? That's the purpose of those. They're just a little short of two minutes. Hey, this is what's going on.
Natalie Picha:Right. And, you know, we started doing those with the thought...we have a pretty good following at this point who are like, when's the next podcast dropping ? When's the next podcast? So we thought we would kind of fill in the gaps with those market minutes. So be on the lookout, everybody. Those are going to be posted to social media. For those of you that are on our email distribution list, you know, there's going to be links there. So, if you're looking for more information and really just straight talk about the markets, that's going to be another resource.
Glenn Royal:And I would say, too, if you have a request for certain information, a topic that you want to know more about, or something that's timely, shoot us an email. Yeah, let us know. We'll be happy to address it.
Natalie Picha:Yeah, that would be great. Maybe we'll actually put a whole podcast together that's just Q&A. That could be fun. That'd be awesome. Okay, this is the first official podcast of 2024. An election year.
Glenn Royal:Yay! My hair's going to be gray by the end of this year.
Natalie Picha:I'm sure mine already is. Most of our clients and most people seem to think that election year is bad news for the markets. But historically, that's not necessarily true.
Glenn Royal:It's not. And , you're starting to see a lot of charts and all these things coming out showing how strong this type of election year is. But I want to warn people about, you know, finding correlations. And trying to find data that supports your hypothesis. You have to be really careful about that. And I think this is a chart that that's being, you know, widely disseminated that, frankly, I'm a little suspicious about. It's true. We've always had an up year, but I think it's more predicated upon the economy and earnings more than is about the politics.
Natalie Picha:And if you listened to our last podcast, and I encourage you to go back and listen to that last one. One of the things that we mentioned is that a lot of Wall Street missed their predictions. It was a pretty big miss on Wall Street for what was expected in 2023.
Glenn Royal:Yeah. There are some career changes going on because of that.
Natalie Picha:You're right.
Glenn Royal:Not naming any names , but there's some movement going on.
Natalie Picha:So, to your point, trying to create these correlations and look at all these things, you have to be careful. Right. I think predictions are hard to make.
Glenn Royal:They are. And the pandemic has distorted a lot of the data. We're still dealing with the effects of it. That boom-bust cycle was just...or bust-boom cycle, really was really extreme. And that's in the data. So I'm...yeah, watch that...be a little cautious.
Natalie Picha:So, just thinking about the election year as a whole and where we are historically, it has been positive for markets. But we're in this place right now where inflation has come off the boil for sure. The Fed has reached its terminal rate, which we talked a lot about last year.
Glenn Royal:Five and a half percent.
Natalie Picha:Right. Is there a pivot or not a pivot? And how does the Fed stay out of the crosshairs of an election year? And I mean, there's so much going on in that space.
Glenn Royal:They can't stay out of the crosshairs in an election year. It's just not going to happen because they control the cost of money. Right. The supply of money. Banking. They're going to be in the political crosshairs. So what we really need as investors, though, is for the Fed to remain independent. Because you want that independent voice affecting the money, monetary system. Free of political influence. Right? I'd like to say that's the case, but we're humans. And I'm sure it keeps sending some... But by and by, I would say largely the Fed is a body of academics dedicated to their dual mandate of, you know, price control and full employment. And that's what they'll always focus on at the end of the day. Irrespective of who's in the White House or what party.
Natalie Picha:Right. And the danger...I mean, I know everyone's calling for a cut in rates. But in reality, if they cut too soon, we could be looking at another spike in inflation. And that really was the job to be done here.
Glenn Royal:It is. And trends in the right direction. I mean...we peaked...if we look at something...PC, T he Fed's preferred measure of inflation, t he price consumption index i n June of '22 when inflation was at the peak, this was 7.1%. It's now declined down to 2.6% on its way to that Fed's 2% target. So, I'd say a lot of the big inflation f ight i s behind us. But we do have those fears of the seventies that are deeply embedded in this Fed's psyche. They don't want t o see potential for reigniting of inflation. If they go too soon. So what you're seeing right now with interest rates, w here a re rates going to go? What's the bond market going to do? What are stocks probably going to do? Because of the cost of capital, all that's kind of in play. I think Powell was pretty clear that the first cut will not happen in March. It's now possibly in May. The market's got about one a nd a q uarter points of cuts, you know, five-quarter p oint cuts. W e n ow i n the end of the year, I don't know about that. So when I look at this economic cycle, what's a little bit confusing to me is are we at the end of the cycle? A re we at the beginning of the cycle? I can kind of make a case both ways. And so if I'm at the beginning of the cycle when equity valuations are at an all-time high and yields are up a little bit, then I would think rates are going to stay higher for longer. The Fed's g oing t o a ir a l ittle bit still on that caution o f b eing a bit restrictive w here the m arket's pricing i n one a nd a q uarter. I 'm kind of more i n a three-quarters to one, a little bit less than that. Maybe the first cut. Because we had such strong data that's coming out on the economy right now, well, it's a little; I s ay i t's the quandary. We think the economy i s slowing down, but yet it continues to grow a t a very strong rapid rate. So that's g oing t o keep the fed, you know, keeping rates restrictive. A nd you know, what I f ocus most on N atalie a s an investor in the bond market i s real rates. What is the inflation-adjusted rate that we're getting as an investor at the end of the day? And those real rates were negative for many years—such a long time. Because of the 2008 financial crisis, they went positive, and, frankly, I can look at the bond m arket and say, where was the bottom i n this cycle? Where was the top i n yields? The bottom a nd bond prices. That was last October. We h ad 4.99% on the ten-year treasury; we'll call it 5%. Real rates got up to two a nd a h alf. So that, that was the peak. Since then, real rates have come down about 1.9. A nd w hy I focus on these real rates is it's a drag on the economy. It is a slowing friction in the economy, this higher cost of real capital. And that will eventually slow growth down. So the Fed is at this point. I have a worry about inflation, but I have to worry about growth at the same time. So they're going to focus on the real Fed funds r ate. How much fed funds rates are above inflation? That's high right now? I think they've got scope to lower it by half a point. It's pretty easy without doing any reignited inflation or any concerns. But just k ind o f send the market a message—the directional t rend of rates. So we'll probably get a couple of cuts over the course of the summer and then, y ou know, maybe a pause at this time. Y ou're still going strong. We'll be watching labor for cues.
Natalie Picha:And I like the way you start talking about those real rates. Because I know that even around here, clients started backing up the truck and loading up money markets. Right. Because all of a sudden, they were getting paid something. And cash wasn't making zero anymore. Right. Wow .
Glenn Royal:Huge increase.
Natalie Picha:Yeah. Big, big difference. But going forward, what does that, you know, what does that mean?
Glenn Royal:So, as quick as the interest rates went up, they can come down just as quickly. And that poses something we call a reinvestment risk. As a bond investor, I'm reinvesting my proceeds of maturity into lower-yielding investments. That was pretty much our whole trade for the last 30 years. You know, you buy bond s to re because rates were coming down now that trade's turned stopped, and it's gone up a little bit. I think that if you're in the money markets during that shorter end of the yield curve. Which the Fed has direct control over, you need to pay attention to what the Fed's doing. So if they start to cut rates, you'll see that come down quickly. One of the things we did as bond investors is there's that duration. That's that sensitivity measure. But it also relates a little bit to the length of the bond portfolio. As those real rates went higher. First at one, then one and a half, and at two, we started extending the duration. We were scaling into it. Right. Adding and capturing that real return for our investors. Where we are now is, I still probably have , you know, over a third of the portfolio and shorter maturities. If I get this ten-year backing up as it is right now, just recently with some of this data, if it gets up to four and a quarter , four and a half or about four ten right now, I would extend more duration. I'm not alone in that camp. Other bond investors going to do the same thing. This is your last opportunity to grab it. This is , yeah . Because rates will settle back down. Maybe they come into three handle range. The question is, what is that neutral fed funds rate? I mean that's like the thing. That's that point of not too hot, not too cold. The Goldilocks Fed funds rate. Would soon to be around two. Maybe that's coming up to three. Which makes the fed kind of go to three rather than two. So those are little things that at the margin we're all looking at as bond investors. But right now, I feel pretty good about the bond market. We're clipping income and north of 5% on our bond portfolios. We hadn't seen that in forever. But as we've talked about before, all we've done is this is normal folks. This is not abnormal. Said what was abnormal in the last ten years' rates.
Natalie Picha:Right. We're back to normal . This is normal. Right?
Glenn Royal:This is normal. So the economy's factoring that in and adjusting to it and businesses. And all that. But these levels of rates aren't too high to be restrictive. Right. Overly restrictive.
Natalie Picha:So, let's talk a little bit about the earnings. Particularly in the tech space. A little bit . Because, you know, honestly, when we look at those higher interest rates and making those corrections for the bond market, being painful. Right? As interest rates going up, the values of the bonds coming down. However, I think we thought that there was going to be a bit more effect on the Mag Seven, as you just mentioned, in their earnings and , money being more expensive and things like that. But we're still seeing some pretty good numbers.
Glenn Royal:Yeah. And , and that's, you know, I've seen that as a big debate in the market right now as the Mag Seven. There are a lot of comparisons to either the Nifty 50 stocks in the seventies that were similar. You know, the.com stocks in the late nineties, two thousand. There are similarities. You know , it was a collective group of stocks. Five stocks were the majority of the market that drove the majority of performance. So, there are similarities. But I do want to point out that if I go back to the dot com era and look at the five largest stocks. In 1999, they were up 59%. The broader market was up 21%. 495 stocks less than five, we're up to about 16. But the next year, these things really came down. What hurt the stocks in the early 2000 was not meeting revenue and earnings expectations. Right . It's all about that. Right now, I have these companies growing revenue. If I look at the Mag Seven as 30% of the SNP 500 today resembles those Nifty 50 and the tech bubble group. They represent 10% of the total SNP 500 sales revenue. Five companies. And it generates 19% of the profits. It's a very different setup . These are very, very profitable companies, and I would argue they are not terribly overvalued. If I go back to that earnings per share example of the 2000 stocks. That PE multiple was 43 times for those top five. Today, it's about 27 to 30 times. It's a little bit more valuation. I look at the broader market where we back then versus a day . Back then, the broader market was 25 times earnings. Today, we're 19. So we're not as rich as we were. Back then when they try to make those comparisons. And the other is these companies are just tremendously profitable. The biggest risk we talked about just before is antitrust. And that lays out over time, but it feels pretty good. Tesla is kind of the oddball of the Mag Seven this year. Maybe just call it the Big Six, right? Or the Mag Seven. But Tesla is, you know, it's a car company dealing with higher interest rates. And expensive automobiles. And they're going to have to address it. And then, frankly, the blooms off the EV. You're seeing a lot of cuts in production, things of that nature. The follow -through of buyer interest is just not there.
Natalie Picha:Right.
Glenn Royal:Range anxiety, you name it whatever you want. But people aren't buying EVs like they thought.
Natalie Picha:Right. So how does all of this kind of play into the deficit, the federal deficit? And again, you know, going to touch on how this plays out in an election year as well. But we know that those higher interest rates, that affects the deficits as well. And it's, it.
Glenn Royal:It can be painful. So, our budget deficit is about 6% of GDP on the trajectory we are on. It'll grow through a hundred percent of GDP in the next ten years. That's clearly not sustainable. So it comes to the politically, unpalatable action. Do I raise taxes and or do I cut spending. Or do a combination of both? Those are really hard political decisions, but that's what we'll have to deal with: the steps that get out of hand. We saw a little bit of last year. And there are two parts . There are those bond vigilantes, right? This term, you hear out there. But what it is these guys like me that says, hey, the U. S. Isn't a great credit risk that it used to be. It's got excessive deficits. You know, there are things going on in politics in this country. So, I want more return for my risks than I'm taking investing in the U.S. It's kind of odd to say that, but that's really how it works. And so you can, as a result of this deficit and the politics required to get it under control, you could see interest rates stay higher and longer than that. Maybe higher to a point where it could cause a recession. And get too restrictive. So that's something we certainly have to be watching for, you know, and we have to look for the political will to deal with it.
Natalie Picha:Well, and I'll circle back around to where we are in a normal interest rate environment; having that higher interest rate, not being at zero, is giving the Fed more tools in their toolbasket. If things change. And it does, you know , we know we've got some geopolitical tensions going on right now. More than a few. If something were to happen, at least where we are with this interest rate, we can scale back if we need to.
Glenn Royal:It's true. I mean, and that's part of why I think the Fed was so quick. You know , the rate of increase was the most accelerated we've seen in rate hikes since post-World War II. And I think a lot of that was one, you know, the surprise of the extent of inflation. 9% on CPI at its top. Out of control. But also, I think it was really an intent by the Fed to regain that toolbox leverage of monetary policy. Right. You know, get away from the quantitative easing all these experimental policies. And you're seeing them bring down their, you know, balance sheet. There have been rolling that off. It hasn't caused any problems yet. That's something else we're looking for. My main focus as an investor is the plumbing of the Federal Reserve banking system. I need to know that the banking system is operating. It's...that's the lifeline. The blood of the economy is the banking system. That the Fed is operating overnight repos, investors are getting any liquidity is in the system. Then we're in good shape. It's still holding in there. I don't see any issue with bank reserves are $4 trillion, you know, because of all the new banking laws. So, banks are stable. I don't see any issues with the plumbing of the Fed system right now. There are liquidity issues with stocks and trading for the big guys that we're all dealing with. But that's a kind of a different piece.
Natalie Picha:That's interesting you bring up banking. Because I mean in 2023, that was what everyone was sure was fixing to happen. We were going to see another 2008 with the banking crisis that we got because of really in the tech space. And some banks that just didn't manage their balance sheet correctly.
Glenn Royal:Right. So commercial real estate's what you're talking about, and that's still what this is. That's a huge problem. NYCB, New York Community Bank is having problems. Their stocks have gotten cut in half in the last few days. They were forced to cut their dividend by half. They were one of the purchasers of SVB. S ilicon Valley Banks' assets. They w ere o f the big acquires. And what came with that was twofold. One i s it puts their assets above a hundred billion. So, that puts them into a whole new category. Of banking regulation. They're a big bank, t oo big t o f ail type. So, they had to change some of their financials to increase their capital ratios. But there's a smoking gun. You know, we're all looking at t hat is this commercial real estate too. So that's still going to be an ongoing issue that community banks, in particular, are going to have to deal with. It makes us a little cautious in t hat space. I like the big banks, though. They don't have that exposure.
Natalie Picha:Okay . That's great. So a little bit around some of the heightened tensions in the Middle East. And what that does for us overall in the economy going forward. A very strong economy. You know, little disruption based on what's going on right now to the oil prices and energy and things like that. So just, overall, how do you feel about geopolitical risk?
Glenn Royal:It's out the w azoo. We got it everywhere! I've never seen so much of it. I g o t l ike, what is it 40% of the free world's having elections this year. We've never had that many in history. So I mean, so I ha ve e lection geopolitical risk around the world. I have the Red Sea. Which is the Suez Canal. One of the two major canals that we spoke about earlier. We also ha d t he Panama Canal, which sidecars dealing with climate, you know, lack of rain, and they can't get enough ships through it because it's too dry. Maybe s ome good news is coming th is spring. Local weather forecaster, some ideas on that. But however, if I look back over the Suez Canal, which is t he Red Sea, the Houthis and the attacks on the shipping and all that. All the major shipping companies are now taking th e l onger voyage around an d a voiding that part. And that's mainly the Europeans. If we think of the, of t he Panama Canal for the China to the, you know, east to t he west. This is basically Europe ov er i n China's trade; they use that sue as a canal. That's a p roblem. It's inflationary for them. And it can cause issues. Two we ek d elay in transit just adds cost of g oods. Now, what we're not seeing, and that's a surprise to me, is the response in t he price of oil. You know, the first thing you know th at I can think of when...I'm a l ittle puzzled by it, fr ankly. But it's, the only thing I can think of is because we're not impacting a major oil-producing nation. Yeah. So Israel, no oil, gas, natural gas , t hings of that nature. However, Iran is a different story. And so as this conflict continues. And the risk for escalation increases. Because of things, you know, it' s wa r. Right. Then you could see that impact on oil. One of the cheap spots of the market right now is energy. It's probably pretty good, you know, we're taking a look at your portfolio at energy right now.
Natalie Picha:Interesting. So overall, we ended our last podcast kind of with a...hey, this is 2023. What do we think of 2024 here? We are now sitting; I can't even believe we're already in the second month of 2024. We're going to be, we're halfway through the first quarter. It's amazing to me how fast the years go by now. What, besides all the other things we just mentioned, are you thinking about? For 2024?
Glenn Royal:Earnings. Earnings. Earnings. Earnings. It's all about earnings this year. We were flat last year in earnings growth. We're 0.3% s and p earnings. We're looking for earnings to come in up 9% this year. Almost 13% next year. If that doesn't materialize, then this market will get whacked . I mean, there's just no question about it. So that's kind of what I'm watching very, very closely. Margins. We're looking at margins. We've been always mindful margins. They're staying fairly steady. But if we don't meet these earnings targets, as we talked a little bit earlier about the Mag Seven and earnings targets, if they don't meet those, that will be their biggest downgrade on those stocks. S o that's what we've gotta watch. But right now, y eah. I've got earnings growth expectations. I've got a Fed that's, you know, more towards cutting rates t han o ur raising rates. And so I feel pretty good about this y ear. We had this term we were kind o f banning about called being uncomfortably long. I think this is a year where you're just uncomfortably long, and you're going to do okay.
Natalie Picha:Well, I appreciate always these conversations. And I always look forward to the comments that we're going to get from our listeners because we love the feedback. So, I'm just going to put it out there to our listeners again. If you have any questions or topics you'd like to hear us discuss, please let us know. And we love to hear; we just like to hear the feedback. We like to hear what you, you got to say about the things that we talk about here. So, just thank you to the listeners. Please subscribe , and leave us a review. You can also find us on LinkedIn and Facebook for additional information and content. If you have any questions or you want to discuss today's topics, please get in touch with us through our website at www.royalharborpartners.com. Whether you're beginning your financial journey now or have already taken steps t owards your ultimate life goals, we a re here to guide you. Experience the difference of working with a firm that empowers your life. A firm that focuses on what matters most — you. Thank you, G lenn.
Glenn Royal:Thanks, Natalie . Glad to be here. I look forward to seeing you again next time.
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