In our second Market Talk episode, Glenn Royal and Natalie Picha with Royal Harbor Partners Wealth Management discuss the wild election week results and the how the stock market is reacting.
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Welcome to RHP market talk. I'm Natalie Picha, Partner at Royal Harbor Partners. And with me again today is Glenn Royal, also a Partner and Portfolio Manager at Royal Harbor Partners. First, let me think our listeners for your response to our very first podcast, the response was so overwhelmingly positive that we wanted to get our post-election thoughts out to you quickly. So, Glenn , this has certainly been a tense week for everyone and we're certainly glad to be on the other side of this uncertainty that we felt in the weeks leading up to this election. Now we want to turn our attention to post-election outlook for markets as we digest at least what we know up to this point. So from what we have seen historically, markets like a divided government and it appears at this point that that's likely what we're going to have. What can you speak to in terms of your own past experience about divided governments and what it might look like for markets going forward?Glenn Royal:
Well, good to be here, Natalie. Good to see you . It's been a trying week and frankly, I'm really glad it's over with under the close of it. Looking forward to the weekend here, I'm sure we all are. You know , divided government. I think a lot of it goes hand in hand with what party's in control, which branch, right? So what we know works the best is the set up that we have right now where you have a Democrat in the white house and Republicans controlling the finances and Congress. In this case, we have a Republican controlled Senate and I think the voters sent a very, very clear message in this election that they're looking for more centrist, not so much the extremes of the party. I say that because we saw quite a big pickup in Republican seats in the house and this election as well. So I think that's kind of baking in the cake, but in all market environments, the best return potential historical returns have been Democrat in the white house Republicans in control of the Senate. So I think that set up as again in front of us.Natalie Picha:
Okay. So given that that's what the outlook is shaping up to be. What's your view on the future economic growth? Considering the virus is still with us, we're seeing some surge in infections you know, third quarter GDP numbers were good, but, and the economy has some momentum, but the virus is certainly going to be a headwind. What are you thinking? You know, ultimately for 2020, and then looking all the way ahead into 2021, that's really, you know , our focus is kind of more longer term play here.Glenn Royal:
You know, we had to clear several things. Number one was the election we've cleared that soon. We'll hear something on the president, but I think what happens is in this setup with the Republicans controlling the Senate, you're still going to see the pro growth pro business policies of president Trump in terms of low taxes and deregulation. That's going to be a positive for the markets going forward. Also the fact that there wasn't this blue wave that everyone expected and they were joking and laughing calling it's really potentially a blue mist that's overcoming us. Right. I think with that , it sets it up where concerns that we had that a wholesale, blue wave policies, stimulus policies would come in, would have the potential of re-ignite inflation with all their growth , programs , the big stimulus bills , infrastructure program , et cetera , what we've seen and that's caused that volatility in the bond market that you see solid bond market selling off is thought that the blue wave was happening last week based on polling. Now that the election results have actually happened was divided Congress. You're seeing rates come back down. So I think the combination of pro business policies and the Republicans control the Senate with, also on the Democrat side, under Biden, we see less rhetoric on trade a calming down of trade and tariffs that we're seeing in that area. So you're setting this market up for really a pretty good 21. I do see the COVID resurging, it's clearly in Europe, you're seeing the shut down. We've got t wo record days back to back days outbreaks here in the United States. We're not seeing the h ospital's overwhelmed yet, but we're clearly looking for that situation. But I think the biggest change now versus spring is we're not going to shut this economy down. We're learning to live with this COVID or learning, frankly, that a lot of the shutdowns didn't have a big benefit, Either t han it just damaged the economy. So I don't see a s ee a s learning to live with it until we get that vaccine or that cure t he herd immunity, whatever it may be. And I keep leaning towards the vaccine and I do get blow back when I bring that up, the blow back is that I'm not taking a vaccine, right. We've heard that time that who's g oing t o take that vaccine, but here's what I want you to focus on. It. Isn't so much about you or I taking a vaccine. It's about giving governments confidence to stop shutting the economy down. If it takes a vaccine to give European governments or Asian or local governments here in t he United States, the confidence to not do that m ore feed into a positive 21. So I'm pretty optimistic about it. We c an, I can talk a little bit more about that all day long. If you, w e c an go to a different s ite. I'm optimistic.Natalie Picha:
Well there's so much, I mean this week has been a very, very long week and I know we're all a little, little punch drunk at this point with all of this, you know? And there's again, just so much information coming out everywhere. You know, yesterday the fed spoke , they kept interest rates the same time bank of England did a big quantitative easing package in response to the virus. What do you think about interest rates going forward maybe into 21 and where the fed is?Glenn Royal:
So you have seen this movement that we just discussed, but also against that backdrop, you have a fed that's more focused on getting this economy going again and getting people back to work. We had a pretty good employment number, came down to 6.9, from 7.9. So we're still seeing this recovery come this way. So I think where the, Fed's going, they telegraph that they're going to keep rates low for the next three years. And I think with this divided government, that's likely to happen because I'm going to have the big stimulus packages of a blue wave of Democrats. So that being said, we're getting to a point, this gets, we're going to peel back the , the letter of the layer of the onion. Again, one more, one more layer here, a little deeper on this. And this has to do with inflation. What's going to cause inflation, you have interest rates practically at zero and inflation. We've actually had what we call negative, real rates. Going forward, if you buy a 10 year treasury, you're buying it knowing you're losing 1% of your purchasing power today because of negative, real rates. What I'm concerned about a little bit and fed chairman Powell spoke to this yesterday out of the fed meeting, is that you don't want to see where the fed starts to monetize fiscal policy. So we haven't had the, we've had the fed where it basically, you know , does everything it can for full employment, low inflation and the banking system and making sure that's working, but we haven't had a , and the government, the Congress white house has basically had all fiscal spending controls through their budgetary agreements. If we ever come into the danger when this was perhaps a little more risk of a blue wave, but I think that's tampered down some, but if you get where the fed is actually monetizing, Congress's spending authority , then you had this big 800 pound gorilla, us government crowding out purchases amongst the rest of the economy. That's inflationary. So that we haven't seen that . It's one of the reasons we've been able to see the budget deficit increase because we're growing our GDP faster than we are debts. Right . But we're getting to that point because of the high debt levels that I think there's some risks there that we may see that. So we're cautious of it. And at the same time, I'll talk about the politics again. Since the Senate's in Republican hands we've had , I've noticed Senator Ted Cruz and Senator Lindsey Graham, both talk about being budget Hawks again. So they're going to come back focused on the debt in the Senate for the next four years to offset any of that spending . So it may have an impact, a lesser impact on inflation. We don't see anything in the short run that would drive rates, higher. Inflation robs you have your purchasing powers rates go higher to compensate for that happening. But it's certainly something we're watching. I think, you know, we talked a little bit, I may segue here a little bit about the 60, 40 portfolio, the old traditional balance , what do you do? Right. And, and so I don't think we're going to get much interest rate payments out of the bond market. That's going to stay pretty much like it is for a few years, cause that fed put on it, if you will. I see that where clients , are gonna have to shift is over more towards growth. There is a potential for the private equities and the alternative investments in things that you go for, but those are risky assets. So we're going to be in a situation where we're going to have to compensate in order to get that 7, 8% return you're used to probably increasing equity exposure. Unfortunately. I still think that bonds served their purposes as a diversifier of risk. However, at zero rates. There's not that interest coupon payment of 3.5% . That would give you a real benefit, if the stock market went down. So we're not seeing that from bonds anymore. And that was the case in this last few months, you've seen stocks sell off in the bond market , sell off at the same time or both go up together when normally there's a counter weight to that. So it's an uncertain area right now. But I think it does say it 60 40 was your traditional portfolio. Maybe need to go to 70, 30 going forward until rates do normalize. And we get back to that. But without a big growth push from Democrats, you know , blue wave, I don't see rates going that much higher.Natalie Picha:
You know, from the standpoint of how our team operates, we lean heavily on planning first and then we into the portfolios. And then we talk a little bit about, you know, okay, how, how are we mixed? What's your investment mix? How's that look for you? I think it's even more important in times like these, to really look and understand how your portfolio is invested, what your goals are, and what your time horizons look like and things like that, because we do have to look at what your rate of return needs to be, your personal rate of return to make that goal. And maybe just a traditional 60, 40 is not gonna potentially get you there.Glenn Royal:
Not in a zero rate world. I'm afraid not.Natalie Picha:
Okay. Well, like I said, there's, there's so much that we could unpack about this week.Glenn Royal:
I like to add one thing. If I may, one area where we're seeing interest that we are starting to move on a little idea here and that's back in the international markets, even more so in emerging markets , they're in a pretty good sweet spot here. You have removing potential issues of trade. You know, the tarif rhetoric that's out there calming that down, which is making the dollar kind of go calm here. It's not spiking up, which is bad for merging of economies because they pay everything and the dollar dollar cost them more. So the dollars weaker kind of calming down in here and I think with the calming of the trade rhetoric, these emerging markets are really setting up some pretty good opportunities in here. And it's , it's something that we've recently taken some positions in and I'm looking forward to that. So you , what you've seen is the leadership in this market has been all technology, right? That's really, really the last 10 years , tech has been at . And it continues to be a good spot. It's where all the earnings growth is the work from home, et cetera, et cetera, that benefits tech. But I think that when you look at the valuations of tech and you see that they're , you know , two and three standard deviations on the price earnings, multiple compared to historical norm, these are rich stocks. There's a reason they're profitable, right, where we're going, where the growth is. But if we start to see growth broadened out, and you saw it in industrial , you saw it in material , you saw in a lot of stocks that look like they could pick up in this broadening global economy that we see going quickly in a post COVID world. Then I , that's where I see value in the classic sense versus growth and also international versus the US , those stocks have really been left in the dust the last 10 years. And we may be in a leadership change in the market. You can see it happening in the last few months. So , that's the only thing I'm a little cautious of. I t s ays leadership changes at different points i n t he market cycles. And we may be in the midst of one right now.Natalie Picha:
Okay. Well, thank you so much for just breaking some of this down for us. I know that our listeners really, really appreciate it. So , um, thank you so much for joining us for this episode of RHP Market Talk. I'm Natalie Picha. If you have comments or questions about today's episode, please find us online at www . royalharborpartners . com We would love to hear from you. You can send us a message and you can also subscribe to our podcasts on the Apple Podcast app or follow us on Spotify. Thank you for listening.Disclosure:
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