Where are we going? That appears to be the big question.
The Fed continued its hawkish tone at the late August meeting in Jackson Hole. There are 3 more Fed meetings in 2022 and we are expecting additional interest rate hikes. We will be watching very closely.
In this episode, Natalie Picha, Glenn Royal, and Jason Strzyzewski look at the possible market scenarios for the remainder of the year.
And if you have grown tired of our rollercoaster analogy, have you heard about the "W" pattern yet?
Get to know us at: www.royalharborpartners.com
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
Where are we going? That appears to be the big question.
The Fed continued its hawkish tone at the late August meeting in Jackson Hole. There are 3 more Fed meetings in 2022 and we are expecting additional interest rate hikes. We will be watching very closely.
In this episode, Natalie Picha, Glenn Royal, and Jason Strzyzewski look at the possible market scenarios for the remainder of the year.
And if you have grown tired of our rollercoaster analogy, have you heard about the "W" pattern yet?
Get to know us at: www.royalharborpartners.com
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 22. Brought to you by Royal Harbor Partners Wealth Management. Located along the beautiful Gulf Coast of Houston, Texas. Serving families across the country. I'm Natalie Picha, founding partner...
Glenn Royal:And I'm Glenn Royal founding partner...
Jason Strzyzewski:I'm Jason Strzyzewski investment analyst.
Natalie Picha:Welcome guys. And here we are once again. Another podcast! And it feels like we keep talking about the same subjects. Just recently finished up the Fed meeting. Late August Fed meeting in Jackson Hole. Inflation. Inflation. Inflation and interest rates. So, just to kind of kick us off, we got another 75 basis point hike. We're probably going to get a few more hikes this year. We've seen some market volatility, certainly over the summer. As we're recording this podcast today on September 6th, we're seeing some green on the screen. Where are we now? That's the big question.
Glenn Royal:Yeah. Where are we going? Those are great questions. Hey, y ou k now...
Natalie Picha:Anybody got a crystal ball? That's what I want to know.
Glenn Royal:Sometimes it's cracked. But yeah, we have one. Yeah. So you did...you had a Jackson Hole meeting and you kind of quickly set that up. June was last time we were visiting and you had that's when the market started to rally, it had sold off to the bottom of June. And we talked about, it looked like capitulation that day, and then sure enough, participants came in the market, took off. And then we got to Jackson Hole. And what the Fed was saying is, wait a second...cool your jets. You are misunderstanding and misreading us. The consequences of this market rallying over the summer was it basically negated all of what the Fed was engineering. Which was a tightening of financial conditions. And, you know, that's what they're trying to do. To cool this economy down and bring inflation down. They did it by tightening financial conditions. Goldman Sachs has created an index called the financial conditions index and it's something we track. And you can clearly see it. So, as equities rally and the bonds rally, that eases financial conditions. Powell did at Jackson Hole. Tighten those back up.
Jason Strzyzewski:Yeah. Bringing the market back to reality. The market was really pricing in that the Fed didn't have to do that much. Okay. Inflation's finally ticking down a little bit. Still pretty high. So the market was waking up. We've got plenty of work ahead of us. The terminal rate, you know, that's something that's talked about quite frequently. Where are we? Where are we going? And how long are we going to be there? That's the real question for'20,'23 and beyond.
Glenn Royal:If I had to answer that I'd be only working for myself. Hey. I mean the terminal rate is that's that end rate, right? Where the Fed's going to finally stop raising rates. And Jason we've looked at this and currently the Fed I think is around three and a half Fed funds are, excuse me, two and a half Fed funds rate. What they're trying to do here in order to cool the economy, is they're taking the Federal funds rate through what we call neutral. So the neutral rate is that Goldilocks rate. Not too hot. Not too cold. Just enough to continue the economy. Well, that's kind of a soft target. There's no hard rate what that is. So, there's an assumption it's around three and a half percent. Feds, two and a half. So we look at what's the terminal rate, my guess would be that it's going to be to where the Fed and based on what chair Powell is saying, it's through that neutral rate. So if the neutral rate's three and a half. Maybe the terminal rate's four. And we had another Wall Street Journal article out this morning talking about a three quarter of point increase in rates at the meeting here in September. I take three quarters there. I take another half in November and then a quarter point in December and I'm at 4% Fed funds rate. So, then we start to see, this is the term rate in the sense is....is that too much? And we can talk a little bit further, Jason. You and I look at the inflationary outlook and what the Fed's trying to do to get it back down as 2% average inflation target.
Jason Strzyzewski:Yeah. That's the tough point. We're in the show me stage. Of this hiking cycle. We have a couple on row of our belt already, but we're waiting to see the data. The economic data things start to cool down. And those conditions tighten. To your point earlier with the equity market rallying from mid-June to mid-August. All of those conditions that were tightened, which the Fed was trying to do was blown right back up. So, we're waiting to see the data. It's very patchy at this point. So we're really data dependent. The Fed is very data dependent to try and get some direction. How much to hike, how quickly and how steeply to do it.
Natalie Picha:We've also got the issue that, I mean this inflationary environment that we're in, is somewhat a bit unnatural. And unprecedented. Right? I mean, it's, we're talking about the Russian-Ukraine War. We're talking about supply chain logistics issues. We're post COVID, right. Pandemic. Those are not your typical inflationary issues that we've had to deal with in the past.
Glenn Royal:No, I think we hadn't that in 30 years and all of a sudden that brings it on.
Natalie Picha:Yeah. What is the risk going in the other direction? As the Fed is basically stepping on the gas. As hard as it can. And they've said they're going to continue, right?
Glenn Royal:Yeah. Then the risk that the market will start to price in as a Fed policy mistake. You heard this term like being thrown around, that's where the Fed raises rates too much and throws us in the recession because they were excessive on monetary policy. That's a real risk. I mean, it's always a risk. And I think the track record of the Fed shows you that's a probable risk. The way their history is and then it got to be the challenge of it, cuz what the Fed is doing today, typically isn't felt in the economy for a year. Right? exactly. So what makes this cycle so much interesting and different is what they call front loading. So, because we were at rock bottom, a quarter of a point zero on Fed funds rates, and they're trying to get u s back to that neutral rate. This degree h ad c hanged almost four percentage points, y ou know, three a nd three q uarters by go to four o n f unds rate. That's pretty drastic. And so a lot of what we're seeing today, that the Fed's a ction hadn't even impacted us yet. A nd we t alk about how effective the tools are. The Fed t hat they're blunt. A nd I think you're seeing t hat in the mortgage market t oday. A nd quite h andle, you're seeing reduced prices in homes. You're seeing formally hot areas of the country...Salt Lake City...some of these others, really cool down. So the impact is starting to come in through the system. And we're seeing it today f or those first early hikes. That's my concern, it isn't so much t hat inflation continues to rip away from us and all that. I'm more concerned that, the nature of inflation that we had today, the Ukrainian War, the logistics, C OVID a nd all t hat cheap money that came into t he system. While that stuff heals itself. Right? That's I hate to use that word transitory, but that's what they were kind of talking about. You don't necessarily need monetary policy to cool those things off. So that m ight...m y concern is that we're going to get the inflation c all w rong. Not that it goes up. That it drops faster than we expect. Because of that s elf correcting nature of it. So if there, we then h ave the Fed that's this l ate in the game with another, y ou k now, 1 50 basis points to t ack onto this thing, t he Fed eral f und r ate, I think that's a risk. So we're getting to the riskier area o f t he Fed hiking cycle. And it will be data dependent as Jason was saying. No one will w ant t o see a CPI Print, like, y ou k now, Wall Street. W e'll b e watching this stuff like a Hawk. We'll be looking at t he PCE. CPI. W e'll look at labor. Y ou k now, y ou had a pretty good job. That's something that's really peculiar about this whole s etup. We're in all o f' em are different. But this one, the consumer's in pretty good shape. Government's in pretty good shape. So are corporations.
Jason Strzyzewski:And I was going to touch on that Glenn. The underlying economy is still strong. We have a good economy and that's why we're able to do this. And that's why it's got most of the street under the belief that if we are in a recession... we very well might be...but it'll be very shallow and short. Not too long.
Glenn Royal:I would think so. And that's our hope. That it is shallow and short and we don't have to have a deep recession. Particularly one associated with big job losses. You know, that's normally when I think of recession. I think of job losses. We are seeing job losses in certain sectors of the economy. Technology notably. And that's probably more related to the cost of capital.
Jason Strzyzewski:Exactly.
Glenn Royal:Those rates have gone up. They're having to pay where before...
Jason Strzyzewski:...all of those companies...
Glenn Royal:...you could hide a lot of mistakes with free money.
Jason Strzyzewski:Exactly. All those companies that were propped up on cheap money. So we're seeing that get filtered out of the system. Which again, brings us back to more of our investment philosophy. Looking for value oriented companies. Dividend payers. Real assets. We've been talking about this all year and we're sticking to it.
Natalie Picha:So, let's kind of take all of this information now. We're the people that get to kind of be behind the curtain, right? so we're, we've got all this data and this information and we're putting these portfolios together. We have kind of the inside information as knowledge on how those portfolios are constructed. Well, let's talk about how this feels to that consumer. To this typical retail investor. To the current clients. Right? Where markets are down. Right? Portfolios are down. We know what we own. We know why we own it. We know what we expect from that. We don't have crystal balls. We can't, you know, make a prediction, but we have the data. But how does it feel to that typical investor out there who needs to understand these are business cycles. Even though this is an unusual one. We're going to move through these cycles and we manage through those cycles. How do we kind of address that psychological bent? Right?
Jason Strzyzewski:It's our job to take that out of play. We take investing from a fundamental standpoint. Take emotions out of it and stick to very strict principles that guide our portfolio decisions. We might have databased tactical tilts in certain sectors and areas of the market. But it's based on the data that's out there. And if we need to pivot, we do that very quickly.
Glenn Royal:Yeah. That's why you want egg heads like Jason and I. You know, frankly, I can tell you how it feels. It's frightening. It's scary. When is it going to end? You know, there's all kinds of emotions that go through getting your monthly statements, seeing the value down from what you bought at. It's just, it's natural. Right? Where I take personally, what I do. You, I'm no different from everyone else. I, you know, I have these same emotions is I look at what we own. I go to the portfolio and I look at the individual names. We own quality, large established companies that aren't going to go out of business because Fed funds are 4%. Not going to happen. So the main thing I really I want investors to understand is we own quality assets. The Fed is raising rates. That's always hard for the markets. When they're doing that. The Fed will end the rate cycle and the cycle will begin again. The gains tend to be three quarters at a time. Declines are about a quarter. It's part of it. It helps us to correct prices. It helps us to bring valuations back down to normal levels. But it certainly is frightening. It's scary. It turns your stomach. But if I can, you know, give our clients any comfort, I would say you have the Royal Harbor Partners working on your behalf. But...you know...look at the portfolio and see what we own. And I think that'll give you sleep comfort at night.
Jason Strzyzewski:I think the big thing too, is something we reiterate quite a bit. Is we really out. We value the protection of capital. So that means we prioritize the out for performance on the downside rather than outperformance on the upside. Again, taking less risk for reward. We'd rather do that, than step into a market that's more unsure when we have all of our investors.
Glenn Royal:VERO said, that's exactly it. We focus on the downside more than the upside. We want to participate. I mean, making money ranks right up there with oxygen, right? Not the most important thing, but it's up there. So we fully want to. But the way we're able to do that, is to minimize the downside as much as possible. We don't have to work as hard. We just need to participate. And t hat gives us o ne run for.
Natalie Picha:Well, and I'll tie it all back into what we do on the planning side. Right? So again, when we are doing the financial planning and we're looking at what a person's individual goals. What their value system and their goals are. What we want to do is we want to put that in line with whatever the portfolio activity actually is. Because at the end of the day, we know historically what the markets look like. What business cycles look like. We can look at that. We just look backwards and look at the history. But we don't know what's going to happen in a person's life. All we can do is do the best that we can to plan and to set aside the assets needed for each goal and help people to think through what it's going to take for a 12-month cycle, an 18, a 24, a 10-year, right? How long are you going to have to get your money to last for you? And quite frankly, putting it under the mattress, is probably not going to get you there.
Glenn Royal:We have an opportunity. It's just not fixed income. I like to throw that on the table. I hadn't seen it a long time. Bonds are looking attractive. We talked too about this Natalie is that I think this is important for clients to understand is, anytime you have a need for cash. A big cash expenditure within one year timeframe. You probably shouldn't put it in stock market. Bonds are okay. Something stable where we can earn it back. Right. But that's where they work with you and Michelle on the planning side of it. To know how to do that. The other is that this is a really, really good time to address your tolerance for risk. You have a tolerance situation in front of you. And if you're finding that it's more uncomfortable. You aren't able to look past this. Then we need to readdress that. We can do things by dialing back some of your equity exposure. It needs to work with your plan. Of course.
Natalie Picha:Yeah.
Glenn Royal:There are opportunities. Or maybe, you know, take away from this is what my real risk tolerance is. And it changes, you know, as the older we get. And if you're 20 years old, you got to be all stocks. You got to be aggressive as can be. You know, if you're at that age, you got to sale going on here. But if you're getting to be like me and you know...you see the horizon here, maybe I'll be a little bit more conservative. Now that being said, for the first time in over a decade, I've got the opportunity as a portfolio manager, to give you a balanced portfolio that where you actually are making money on the bond side. It's been a long time.
Natalie Picha:Right? Yeah. Well, I mean, the question has been from, you're just hearing it out there across the entire market is. Well, what do I do to keep up with the inflation rate when the inflation rate's 8, 9%, you know?
Glenn Royal:So, in the early stages of these events, like inflation coming on, it is hard. Although everyone's trying to adjust and find the asset classes. But you will find the asset classes. We will find those are able to generate that inflation adjusted return. May be real estate. It may be alternative investments. Lord knows what. But the market is going to gravitate towards that. We thought it would have been gold, right? And gold hasn't performed right? Because it doesn't pay you one penny in interest.
Natalie Picha:No, it does not.
Glenn Royal:And so you're seeing the bond market with those real yields coming up. Those inflation adjusted yields, coming out to attractive levels that have sucking all the money into bonds. Those are little things that we're here to help you understand and work on client's behalf. Still, at the end of the day, what Jason and I do is added side car to planning. You know, it's a means to get you where you want to go. And planning is the map to take this where you want to be.
Natalie Picha:So, I think we'll close out with a comment that I've heard thrown out. And I think you've mentioned it, as well. That markets also have a"W" pattern. You know, kind of in the second down of this leg. So, go ahead and, you know, I think we started this year out with the rollercoaster ride. I feel like I've overused that comment. And now we're talking the"W." But basically that's where we are. So we're fixing to be heading into the fourth quarter. I can't even believe we're already talking about the last part of this year. It just feels like'21 was a blur and'22's been a bigger blur. But we're talking about a possible"W" pattern. What do you mean by that?
Glenn Royal:Well so, typically...markets, when they're trying to put in major bottoms,"W"...if you think of the first down part of that character, that's what we had back in June of this year, had that big sell out. Price earning multiples...very cheap. You know, everything looked really attractive. And then, you know, you get their balance. Really bear markets are known for having bear market rides. They're periodic. They come. And, and so with the end of bear market, you can't make money if you're a trader. And, but we're at that point where markets, when they start to correct, and you get a little bit further into that, they historically try to go down and test that prior level. That first leg of the"W." They want to see if that's the real bottom in the market. Most of the time they get pretty close and they don't actually undercut that prior load. And that gives you a pretty good comfort level that the bottom's been in place. We shake out the"we cans", we shake out the non-investors. The runners. The punters are...whatever you want to call it. But that's what that"W" is about. So, historically it's been a pretty good technical indicator to help you find bottoms in the market.
Natalie Picha:Okay. All right. Well...we've got another Fed meeting. Well...we got three more Fed meetings coming up this year. We're expecting some more interest rate hikes. going to be watching that inflation data. There's still a lot. It's a lot more of a year to come. Even though we've got three months left!
Glenn Royal:The one thing we're excited about is that real yields in the 10-year, when we last we're looking at corporates few months ago, the real yield was at 85 basis points. Getting an inflation adjusted real return of eight-tenths of a percent. I can tell you if you want to watch one indicator, what the stock market is going to do? Watch the real yields or treasury bills. Which are close to that. But as real yields started to roll back over, stocks screamed higher. And then real yield started coming back up and stock started going down. Again, because I started to get competition from fixed income. Which adjusted return. So that's the biggest thing. If we're back up to 85 basis points on real yields. One gets me really excited. 85 is pretty exciting. But one is like...I know you all know I'm a geek. But I really geek out when we start talking about this world. But what it means for our clients, is we can de-risk the portfolio. Adding fixed income and get paid a rate above inflation. I haven't had that since 2008.
Natalie Picha:Well, thank you Glenn. Thank you Jason, for your comments. I really appreciate it. I know our listeners do too. I just want to thank all of our followers for listening to RHP Market Talk. If you have any questions or you'd like to discuss today's topics, please feel free to contact us through our website at www.royalharborpartners.com. At RHP, we like to say we are passionate about planning for your financial future. We're devoted to our relationships with multi-generational families, for the creation of successful legacies. 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?
Disclosure:Royal Harbor Partners is a registered investment adviser and the opinions expressed by Royal Harbor Partners on this show are their own. Registration of an investment advisor does not imply a certain level of skill or training. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.