0:09

Welcome to RHP Market Talk , Episode

0:12

number 35, produced by RHP

0:14

Wealth Management, an independent financial services

0:16

and investment advisory firm based in

0:18

Houston, Texas. I'm Natalie Picha,

0:20

Chief Experience Officer joined today

0:23

by our Chief Investment Officer, Glenn

0:25

Royal.

0:25

Hi, Natalie. Glad to be here.

0:27

Glad to be back in our normal...our kind

0:30

of our normal...market conversations. Just

0:32

the two of us. And we are talking a little bit about

0:34

what 2023 looked like and setting

0:36

the stage for 2024.

0:38

I can't wait to hear this conversation.

0:43

For our listeners out there. We do

0:46

prep for these things, but we never quite

0:48

know where the conversation might go. So

0:51

I think to Glenn's point, I'm always

0:53

interested to listen...just like

0:55

everybody else out there. How did

0:57

that turn out? Let's hear. Let's hear what we

0:59

might have to say. I think everybody

1:02

is kind of scratching their head and looking back

1:04

about just 2023 in general

1:07

and what we thought we were going

1:09

to have coming off of 2022, we're still

1:11

kind of, I think we're still sort of reeling from post-pandemic, you

1:16

know, stuff. And I

1:19

saw this really cool headline

1:22

that Bloomberg put out this last week about

1:25

Wall Street being humble. Right.

1:27

That market will humble you.

1:29

It's pretty hard to humble Wall Street, too. That's

1:32

true. It's pretty big egos. Uh, yeah...it

1:36

was actually; I saw a stat yesterday

1:39

that showed, going back to the turn

1:41

of the century, every year,

1:44

all the strategists across the board have

1:46

forecasted market gains. And they're generally right.

1:48

We had the gains. But this year was

1:51

the first year that every market strategist

1:53

was wrong. They all called for

1:56

a recession, in '23.

1:59

And if you recall, we

2:01

went into January, and

2:04

I can...you know, I still remember quite clearly. I got the scars. I remember

2:07

it . But it was all about recession. We

2:10

were fearful of a recession. And

2:12

so we had bond yields actually decline

2:14

. The stock market went up. Prices...you know,

2:17

went up on bonds. Then

2:19

we flipped to February due to

2:22

inflation fears, and the bond market

2:24

came crashing down, and that affected stocks.

2:27

And then we went into March, which w

2:29

as the banking crisis.

2:30

Oh, that's...you know what? I'm glad you brought that up.

2:32

I've already forgotten about that. Yeah .

2:34

A lot happened this year.

2:35

There's been so much in the headlines

2:37

and so much up and down. That we've

2:41

been hit...I think we came out of the COVID crisis afraid

2:45

of whats the next shoe that would drop. And

2:48

then we got a shoe. And

2:50

then another shoe. And so the whole thing...you really

2:52

did...it was like the

2:54

sky is falling once the next piece...

2:56

Yeah. It felt that way. And certainly coming into

2:58

this year. It did. And, and that's

3:01

typical, you know, of course, we always, you know, we're

3:03

always talking about the two emotions markets

3:05

drive on fear and greed. That's right. So

3:08

we were full of fear coming

3:10

into this year . Uh, and that

3:12

actually probably set the stage up for a

3:14

good year. What was the big surprise,

3:17

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

3:24

intelligence. And that created a little mini

3:27

boom that went through the summer. Until

3:30

we got fearful about yields again. And the bond markets

3:32

started going up, and inflation and

3:34

the Fed were not through their hiking cycle. Then

3:37

we went until that all reversed again

3:39

in November. So, basically, what

3:42

you're hearing is... what

3:44

we're describing is an extraordinary amount of

3:46

volatility that's coming in the market. And

3:48

that's more emblematic, I think, of

3:51

a rising rate environment. Now

3:54

we're kind of on the backside of that. So

3:56

I feel better about '24 as

3:58

we're on the downside of rates,

4:00

and no longer is the Fed raising. They're now

4:02

cutting rates. The volatility tends

4:05

to come a little bit out of the market there .

4:07

Right. The moral of this story is

4:09

predicting markets is pretty close to impossible.

4:12

You just never know.

4:13

You know it is. With you

4:15

know with consistency. You may

4:18

be good every once in a while. You know...we all have

4:20

good calls, but it's very, very difficult

4:22

to do on a consistent basis. Which

4:25

argues it back to investing

4:27

for the long run. Right. And , you know...checking your

4:30

asset allocations. Staying true to your financial

4:32

plan. That sort of thing that we espouse

4:34

all the time here.

4:36

So, you know, all the way through '23,

4:38

we've still been...we've been in a

4:40

rate hiking cycle. As you mentioned. We're

4:43

all pretty confident in what we're hearing that

4:45

we're done. No more rate

4:48

hikes. Now the market's starting to

4:50

price in...cuts.

4:51

Cuts. Yeah. So,

4:54

and a lot of that is based on inflation. I

4:56

mean it's, it's really kind of

4:58

here today; all the news cycle is Goldilocks.

5:01

I mean , we just printed the revision

5:03

for the third quarter GDP came out, in

5:06

the first revision, it was 5.2%. That's

5:08

the highest quarterly growth in 40 years.

5:11

At the same time, I don't have

5:14

big job losses in this economy. People

5:16

are hanging in there . We're not giving...you know, the unemployment

5:19

rate's still historically low. A little bit of a backup. But

5:21

not much. So these forces are

5:23

combining to really cause a little bit of confusion

5:26

in the market. Because I've got...it's giving

5:28

some indication that the economy

5:31

is still too strong. And that's why the Fed has

5:33

to raise rates. T he fear of this inflation. Right.

5:35

Again, we've got a Fed that's fighting t hat goes back to

5:37

the seventies. When t hat... Then fed

5:40

under c hair Arthur Burns, you

5:42

know, did the same thing. They r aised rates to fight

5:44

inflation. A nd when things looked like they

5:46

were cooling down, they came in early a nd cut r

5:48

ates. Well, that ignited inflation much

5:50

like a flame reignites, r ight? Boom.

5:52

Inflation went again. That brought in Paul Volcker,

5:54

who killed inflation w ith super, super high

5:57

rates. Chair Powell

5:59

does not w ant t o repeat an Arthur

6:01

Burns fed. So he is very, very

6:03

forceful in h is statements of that.

6:05

Aggressive.

6:05

Yeah. But what we are seeing is

6:08

that rates will stay higher for longer. The Fed, in all likelihood, has

6:11

paused. A year ago, last summer, CPI

6:14

was printing 9%. down

6:17

three and a half points to 3.6. We're

6:19

looking for a CPI to come in next year. Even

6:21

fall further down to that 2%

6:24

target the Fed's looking for. That's

6:26

all very...that bodes well for bonds. And

6:29

risk assets in general.

6:30

Do you feel like you know, when we start talking about

6:33

inflation, do you feel like the average

6:36

household has felt that

6:38

decline? I think when we said 9%

6:41

or 12%, it was like the inflation print

6:43

numbers were just through the roof. And

6:47

we felt it at the grocery store. We've seen

6:49

it. You know, we've seen it at the gas pump that

6:52

reversal down to 3.6 that

6:54

you just mentioned. Are we really believing that?

6:56

Do we still feel it?

6:57

So, no , we don't. And you

6:59

make a really good point. Because I'm talking

7:02

with my academic hat on about

7:04

inflation. If I talk with my personal

7:07

shopper hat on? Prices haven't

7:09

come down. I mean, on average, prices

7:11

are 20% higher today than they were

7:14

before the pandemic began. We

7:16

don't see that coming down. All we're

7:19

seeing is the rate of growth of inflation,

7:21

which has got up to 9%, is coming back

7:24

down to those historically low levels. That's

7:26

what the fed's trying to get to. That doesn't mean prices

7:28

are going to go back down to where they were.

7:31

Grocery prices. You know , auto

7:33

prices used are we're seeing prices come

7:35

down, which is driving down

7:38

that overall inflation rate. We still

7:40

see that, but I hate

7:42

to say it, but really, what takes prices down

7:45

deflation is a recession. And

7:48

that's Yeah . Not something we really want.

7:50

Right. We don't want that recession. Well,

7:52

and with the GDP numbers coming out, I

7:54

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,

8:07

the economy's strong, and we were sure that these interest rates, if we are at the

8:11

terminal rate... If we've , we've ended it. Fed's

8:13

done.

8:14

Yep . Five and a half.

8:16

Right. What does that mean?

8:18

Well , for GDP , I think...you'll see,

8:22

and the economists are forecasting lower GDP growth next year, around

8:26

2%. Uh, and what we're

8:28

seeing is a slowing of growth, which I can get into the setup with that. Uh, for next year, we'll see

8:36

as a result of that. But , that slowing

8:38

of inflation. The slowing of growth. Is really bringing us back towards a disinflationary

8:45

environment. And I also see

8:49

disinflation being imported

8:51

into our country from China. From

8:54

Europe, which are actually in recessions, if

8:56

you will, right now. So their prices

8:58

are coming down, and we're, you're seeing in

9:00

oil...oil has come off the b oil. Is trading

9:03

very, very low from

9:05

the risk e vent, geopolitical risk of

9:07

the Hamas Israeli war.

9:09

Right. Right.

9:10

It's trading quite low these days. $77...$

9:14

78 a barrel. WTI.

9:16

So, you mentioned AI a little

9:18

bit earlier. And again,

9:21

this market... It's quite an interesting

9:23

year. Let's talk a little bit about technology

9:25

and the concentration of what

9:27

we've seen. Inequities .

9:28

Where did the money go? Who made the money this year?

9:30

Exactly .

9:31

Where does it come from and frankly, I mean,

9:33

as a PM this is where

9:35

you want to humility. You want to beat

9:38

your head against the wall. Because it is

9:40

very, very difficult when market leadership is contained to just

9:44

a few stocks. So we

9:46

can, for example, see that this year they got

9:49

some stats. This is a little bit old. About a

9:51

week or so data, but The

9:54

Magnificent Seven, that's these big tech

9:56

shots . Apple, Netflix, you

9:58

know, Amazon, and so forth. Tesla they're

10:01

up over 70% this year, and

10:03

they account for 94% of the S&P 500 hundred's

10:06

returns. If I take a

10:08

few things and step back and say, Hey, what did small

10:14

caps do this year? Small caps

10:16

were down. But we were actually

10:18

up about 2%. I had a pretty good November.

10:20

But small caps are heavily weighted towards financials.

10:23

Which is having problems with commercial real

10:25

estate. So that's putting a little drag on

10:27

that area. The only thing that's

10:30

really worked is been these Magnificent

10:32

Seven. If I take the Magnificent

10:34

Seven, and I look at it kind of globally,

10:38

and I say , okay, the U. S. Has

10:40

outperformed the rest of the world. Well, why

10:42

does the US outperform? It comes down

10:44

to U. S. Tech exceptionalism.

10:47

Our tech stack is the best in

10:49

the world. These large companies continue

10:51

to drive profits. They've got strong-quality

10:54

balance sheets. They have everything that you

10:56

could possibly want as an investor to

10:58

be in. However you are paying for

11:00

that. They're rich. So you're

11:02

always running against the fundamental

11:05

investor in me. How can I pay that much

11:08

for one of these stocks? Well, the reality is

11:10

that's what's driving the market. So, if

11:12

you are listening to the market and

11:15

you want to be the market, you

11:17

have to own these stocks. So, we

11:20

own them in line with the S&P weightings.

11:22

So let's talk about it because

11:25

it is the Mag Seven. Because of that, we've got that concentration. But we're getting

11:29

paid in the bond market now. And

11:32

we're, you know, overall, what

11:34

we tell our clients is we talk about

11:36

their plan. We talk about their goals. And

11:38

you're investing for the long term . And

11:40

generally speaking, that's going to be in a balanced

11:43

portfolio. Right. Which is, it's

11:45

going to have some stocks. Going to have some bonds.

11:47

We saw in 2022 a year where

11:50

both stocks and bonds had

11:53

a rough year. Right. That was hard. The

11:55

60-40 portfolio is a general 60% equity and 40% bonds. Which people think of as a balanced portfolio. The

12:04

60 40. Are we back to where

12:06

that's going to do Well?

12:07

Yeah, I think so . This year, bonds

12:10

are basically flat. After

12:12

earlier sell-offs this year, the rally we've recently had has brought their base.

12:16

Basically flat. It's extraordinarily

12:18

unusual to have three years of negative

12:21

bond returns. It's just... It's never

12:23

happened before. In markets,

12:26

whenever I get extremes, that's

12:29

generally an opportunity. So in this case,

12:31

an extreme oversold that fear. That's

12:33

where presents an opportunity. The

12:36

other thing is that with the Fed changing the direction and now leaning more towards rate cuts as we go forward, that

12:41

favors bonds. The recent

12:44

rally we're seeing is that the shorter maturities,

12:48

the, you know, out to 2,

12:50

3, 4 years. Those kinds of bonds are rallying greater in price than the

12:55

longer bonds. That tells

12:57

me that we got a little bit

12:59

of concerns of a slowdown. We need to be careful about

13:01

that. But I'm not... I'm not necessarily

13:04

in the recession camp. I have been, but

13:06

signs are starting to show that it looks pretty

13:08

good next year. We may not necessarily go

13:11

into recession. We have to be vigilant

13:13

about it. The average market declines

13:16

18% in a recession. So we want

13:18

to be very careful of it, but we're not seeing

13:20

signs that that's going to happen. More

13:22

of this soft landing that you , you hear so much about

13:25

. That being said,

13:27

the returns next year...because we're

13:29

on the backside of the volatility that the bond

13:31

market brought , is the sharpest increase in rates

13:34

by the Fed in 40 years. Right. On

13:37

the backside of that, I look for lower

13:39

volatility, but the return expectation

13:42

for stocks , if we look

13:44

at the price e arning multiple, which is the barometer

13:47

o f value. It's running about 20 times

13:49

right now. In the recent rally we've ha., I

13:52

think that S&P multiple, given the level

13:54

of inflation that we have, f air v

13:56

alues, 19,

13:59

18, 20, right. Here is where we are. So,

14:01

two ways that we make money in stocks

14:04

are either through earnings growth or

14:07

multiple expansions. A nd we lose money

14:09

through multiple contractions or earnings

14:11

declines. Right. We're set up

14:13

for that next year where we're going to have earnings

14:15

growth, 6% for S&P

14:18

500 profit estimation after three-quarters of

14:21

negative earnings growth. We're finally turning positive there.

14:23

But I don't expect

14:26

multiple expansions. That's going to be the big

14:28

deal. So I ki nd of see more of a

14:30

year where we have earnings per share,

14:32

estimated growth of about 6%, plus

14:35

dividends. A couple of points on that. So

14:37

in that world of 6 0 40, you've

14:40

got the stock component calming down a

14:42

l ittle bit, not driving as much as it did this

14:44

year. But the bond side of it, that's

14:46

now paying me over 4%. And

14:48

what we really focus on, an d w e've talked

14:51

about quite a bit, is t h e r eal yields. And

14:53

that's what's so important. And that's...that, at

14:56

the end of the day, that's been the big reset

14:58

that's happened in t he last few years. The pandemic

15:00

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

15:14

2008. We've had negative real de

15:16

als f o r t he majority of that time. We now have

15:18

po sitives, but th at's kind of a drag; that's a real resistance that

15:23

we ha ve t o overcome. That cost of capital. But we're

15:26

adjusting back at the end of October

15:28

and were looking at 5% on a 10-year yield.

15:30

We we re p ointing out that that's the average

15:33

level of interest rates in this country since Alexander

15:36

Hamilton.

15:36

Right

15:37

...the Treasury Secretary. So I see it simply

15:39

as this 2008 was

15:41

a great financial crisis that , uh, global

15:44

shutdown , it caused the Fed

15:46

to do things in monetary policy we've never

15:49

seen. Ben Bernanke was a expert

15:51

on the Great Depression. World's

15:54

leading expert. So he enrolled in things

15:56

like quantitative easing.Tthese different

15:59

programs where the Fed expanded his balance sheet.

16:01

That's all being unwound now.

16:04

We had these high real rates. So

16:07

I expect, you know, this volatile is 2008

16:09

was going in, we had the volatility of the

16:11

last couple years as we've come out of this. And

16:14

the Fed's still paring down its balance sheet.

16:17

They're trying to get back to neutral. 2% at

16:19

the average inflation target. I

16:21

think they're going to be successful at that. But

16:24

a lot of the volatility on the

16:26

rising rate side of the trade is now

16:29

behind us, and now we're on the declining side.

16:31

Which ought to be fair winds. I think the downside's

16:34

probably limited in our markets, but the upside

16:36

could be a little capped as we transition to that

16:38

period when earnings start to take off again, which

16:40

we look for in the next years.

16:40

And because we're...because we've

16:43

actually gotten that rise in interest rates. We've

16:45

seen a huge influx of money in the market and

16:47

into money markets. Right. And I think

16:50

the retail investor needs to be aware that,

16:52

hey, when they start cutting rates, so

16:55

those rates go down.

16:55

It does. So that's the most sensitive part.

16:57

Exactly. So yeah

16:59

, we talk about this concept of duration, et cetera, but where the Fed controls the short rates. They

17:05

don't control the lot . They tried that through

17:07

quantitative easing and things like that. That

17:10

was all that controlled ten years and out . But

17:12

these short rates that are in the fed's control, as

17:15

fast as you saw them go up, you'll see them

17:17

come down as the fed starts to

17:19

drop rates. And that's what we're seeing happening

17:21

right now. If I get out there ten years and longer, they're

17:25

staying a little sticky. You know

17:27

, down from five, you know , four

17:29

and a quarter . Right. But it still needs to be more sticky compared

17:31

to what shorter rates are doing. So I would

17:34

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

17:46

aren't bad. Five-year tenure. It's getting

17:48

out a little bit on that curve. You don't have to go

17:51

long. You have to take a lot of great risks. And

17:53

you're being rewarded where 40%

17:55

of your portfolios clipping, you

17:58

know, four to 5% coupons income

18:00

every year. I couldn't get you that.

18:03

Remember we used to talk about Tina?

18:06

Tina is an acronym. There is no alternative

18:08

to stocks , no alternatives . Stocks . Because bonds didn't pay . Well,

18:10

now the acronym is Terra . There's

18:12

a reasonable alternative to stocks, and

18:14

that's fixed income. So the balanced

18:17

portfolio of 60 40, to me, was long,

18:20

you know.. It was cascaded to be dead in the ground.

18:22

I don't think that's the truth that's coming back, and they'll

18:24

do quite well in the coming year .

18:26

So...I know...you've mentioned

18:29

it now... recession a little bit.

18:31

We have a couple of terms that we use Santa

18:34

Claus Rally for the end of 2023. Then, we have

18:36

the January effect. Like I said, even

18:38

when we say it's almost impossible

18:40

to truly predict markets. We

18:42

still try. That's

18:45

part of the job. It is to look

18:47

at the data and really analyze it. And do

18:49

you see the typical Santa Claus Rally?

18:52

Seasonality? These are seasonality

18:54

factors. We've got some big ones

18:56

coming up. We have the Santa Claus Rally, which is just

18:58

typically the nature, the

19:00

market that likes to kind of bid things up towards

19:03

the end of the year. It's just the

19:05

way that goes. Right. There's

19:08

greater value in the January Effect.

19:11

You know, for those that haven't heard about the January

19:13

Effect. This year

19:15

was the greatest example I've seen in a long time.

19:18

We got at the end of 22, and

19:21

all those big tech stocks, Tesla was

19:23

a prime example, down a hundred bucks a

19:25

share. They had come off so

19:27

far that you had people doing massive tax

19:29

loss selling it and through the end of the year.

19:32

So when January hit. You

19:35

had the people coming in that knew the tax loss

19:37

trade . The January effect is the rebound

19:39

in those stocks that get impacted by tax loss selling.

19:42

This year...if I had to speculate,

19:45

you know, put that hat on, right? It's

19:47

probably going to be in small caps in value

19:50

stocks and dividend-paying stocks.

19:53

Let's go back to the beginning of this year. Everybody who's fearful of recession.

19:55

So they all went parked in dividend growth stocks.

19:58

Dividend payers. The option

20:00

premium funds, and all that. They

20:02

haven't done anything this year. They've actually

20:04

been declined . Why ? Because they own financials.

20:06

And real estate. Utilities.

20:08

Because it's all been in the Mag Seven.

20:09

All that goes against the rising rate

20:11

environment. Those things

20:13

may start to do better coming in the next year

20:16

as things calm down. The rates go the other way, but

20:18

it was not in their favor this year..

20:20

So, the other big topic of 2024

20:23

will be the election season.

20:25

Yeah. That's another seasonal factor. Historically,

20:28

in the year of an election, whether it's the first or second term, markets are up. And

20:34

that's simply because they don't want to do anything and

20:36

to mess up the economy. Right? So markets

20:38

have historically been up. So that's

20:40

in our favor of the seasonality of next year.

20:44

If I look at the S&P 500 that

20:46

we set was really driven by those Mag

20:48

Seven, you know , and it's up, you know, 19%

20:51

for the year. If I look at something

20:53

like the equal weight S&P 500,

20:55

that's the more broader market that's

20:58

up 4% for the year. Our

21:00

opportunity in

21:02

the coming year is a

21:04

more diversified portfolio. A

21:07

little bit more international because of a

21:09

weakening dollar. When the Fed raised

21:11

rates. It makes the dollar stronger. When

21:14

the Fed lowers rates, the dollar gets weaker. Well,

21:16

the dollar's a big driver of international performance.

21:19

So we're seeing it right now as a dollar's

21:21

week rates come down. Our international component

21:23

that we have is starting to lift. So

21:25

I feel good about that. You might get the

21:27

January effect on those small caps. Value

21:30

stocks, and dividend payers. But

21:32

I think next year's more of a year about broader

21:35

diversification. And even things that have gotten beat up so badly or really not may

21:39

be done as well. Like gold, it was a

21:42

surprise it hadn't done as well, given all the geopolitical

21:44

risks . It's not 10% for the year,

21:47

but it had competition from a ten-year paying

21:49

me 5%. Now that I'm seeing

21:51

that yields come down, you're starting to

21:53

see gold go up a little bit. So

21:55

gold and perhaps oil, too, are probably

21:57

two areas where good, good hedges

22:00

for next year .

22:01

I'm cautiously optimistic. Right.

22:04

I think if we just go back to 2020, I

22:07

do believe there's some post-pandemic fear

22:10

that we're still kind of walking around with on

22:12

a daily basis. The 2008

22:16

financial crisis. I think... I

22:18

saw people still so fearful of

22:21

that repeat going all the way up

22:23

until maybe 2015 or 2016. It

22:25

took that many years. That there's

22:28

still this sense of the next shoe that could drop.

22:31

But this year has proven to

22:33

be an unexpected

22:36

year. When we were all sure that

22:38

it was just going to be awful all year long.

22:41

And here we are.

22:42

Yeah. It's probably one of

22:45

the more challenging years that I've had

22:47

professionally. Everything that

22:49

you would normally expect. The rule books get

22:52

torn up and thrown out the window. So

22:54

you had to listen to what the market was saying. And

22:56

in this case, the market was seeing the Mag Seven...

22:58

The Magnificent Seven's a place to be.

23:00

Those big that have been there

23:02

year in and year out for the last decade. Our

23:05

greatest risk, going forward to that, is

23:07

antitrust. You're seeing in

23:10

Europe. And you got a case of the first quarter

23:12

with Google and the U. S. Government. So those

23:15

are longer times to play

23:17

out. But they eventually do take those guys

23:20

down. So that's the risk we have to watch.

23:22

Well, as always, our conversations

23:24

are quite interesting. And

23:27

I'll look forward to hearing what we have to say when

23:30

this one comes out. Thank you,

23:32

Glenn, for your thoughts. And

23:35

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