RHP Market Talk

2021 Outlook: Containing Our Enthusiasm

January 11, 2021 Royal Harbor Partners Episode 5
RHP Market Talk
2021 Outlook: Containing Our Enthusiasm
Show Notes Transcript Chapter Markers

Glenn Royal and Natalie Picha with Royal Harbor Partners Wealth Management review the dramatic 2020 U.S. economy and tell us why they are excited about 2021.

Get to know us at: www.royalharborpartners.com

Natalie Picha:

I'm Natalie Picha, here with Glenn Royal, Partners with RHP. Happy New Year and welcome to our first podcast of 2021. Most of you know that Glenn is our portfolio manager who oversees our actively managed portfolio strategies. Today, we want to discuss a most historical market year that was 2020 and how we're looking ahead to 2021. As 2020 began, the U.S. Economy was in the midst of its longest expansion on record, and then the GDP contracted by 31% in the second quarter, as a result of the pandemic. As dramatic as the declines in GDP and payroll employment were, the policy response to the pandemic was equally unprecedented. With governments and central banks worldwide injecting, literally trillions of dollars into the global economy via coordinated fiscal and monetary stimulus programs. The market's preference for growth over value accelerated during this turbulence. Now, some analysts are calling for a 4% real GDP for 2021 when the average is somewhere between 2 and 2 and a half percent. So, Glenn , what are your thoughts about where we're going with GDP and overall economic growth as we look ahead to 2021?

Glenn Royal:

Good to be here, Natalie. It's good to see you as always. Glad to be part of this podcast. I'll tell you , in that light, we expect strong economic growth this year, fueled by federal banker stimulus and government spending that will continue. So expect a really strong year. Actually, consensus GDP estimates via Bloomberg is about 3.9% growth expectations up from a negative growth expectations last year. But we think that those consensus numbers are going to be pushed higher, because of the recent stimulus bill, you had 700 billion that came in December. We think with the new Democratic controlled Senate , 50/50, you're going to see another 750 billion come out. Which will be in additional stimulus checks and other programs. These funds have now caused Goldman Sachs to raise their GDP f orecasts to 6.4% in 2021. That's not the high on the street, but it is one of the higher. So, what we expect, is estimates for GDP growth, to come up through this year, which should bode well and lift the market.

Natalie Picha:

And so when we get into that idea of how hot the market might actually be running and what this recovery looks like, what does that do with the fed and raising rates? You know, we're going to be far from a 2% inflation far from target unemployment. I mean, let's talk a little bit about that and what that's going to look like. And if we are going to get any inflation, how long are the Fed's going to let that run, let the economy run kind of hot?

Glenn Royal:

Yeah. You know, that's, that's the big question today that's seeped into the markets. And I had thought of it as like , inflation is a risk that we'll call it a fat tail risk way out there on the horizon. That's something potential to look for. And what we're starting to see in this market is expectations of inflation are now running higher towards 2%. That's being priced in the market , that and the fed has two mandates. We're the only central bank that has that. We had the mandate of full employment. And we also have the mandate of keeping inflation in check. Most other central banks around the world, just focus on inflation. So, let's go back a few years in December of 2018, when you had the fed raising rates, because employment was full employment we were at 4%, right ? Things were hot. It caused the fed to start to raise rates, the economy couldn't help hold it. We rolled back over. This time around, the fed is already told the street, told everyone, that we're going to keep rates low for the perceivable future. We're going to let inflation run north of 2%. This asymmetrical target of inflation was our 2% target before we're looking to average 2%. Since we're below that, we're going to have to run hotter than two and a half percent in order to get to that 2% average. So the Fed's going to let the numbers run hot, but here's the big picture about inflation. Most of it's dominated by employment. It's wage base that causes most inflation. You're still are unemployment rates of some 8%. So we don't see any inflationary pressures, real ones taken off for really another couple of years, if that. Because we haven't had it for the last 30 years. That's going to be the interesting walk out . It has us looking at it's putting pressure in the government bond market, U.S. Treasuries. You're seeing the yield curve steepen by that. We simply mean that longer maturities, 30 years now, 10 plus years and out had been increased yields have gone higher prices have gone down than the lower maturity. So, that steepening of the yield curve is a positive sign. It's a positive sign that we have economic growth in front of us.

Natalie Picha:

So, in the middle of all of this volatility and everything we've been through, we've seen the market's preference for growth over value. Really accelerate during the turbulence. But now, where do you think we are? We've heard people say that the great rotation, where are we going from here? Right. Are we broadening out? Is that recovery?

Glenn Royal:

Yeah, that's the big head fake, right? We we've gone to, we think values coming back the last several years and you'll see the market shift towards value names and they don't work, it goes back to technology. We're in a situation where in the economy if it's kind of just buzzing along at 2%, not real growth, not negative, just kind of stagnant growth. The 2% which we been since 2008, we appeared in 2010 on the stimulus bump . Then it faded out. But when that happens, we go to growth . What companies are providing the growth, which companies are earning, giving us cashflow power pricing power. That's your tech companies over and over again. So in the U. S . we're dominated and the S&P 500 by technology companies, 20% of the market cap. That's why we bled the market for the last dozen years in the U.S. because of this high, the weighting towards tech, where I think we're seeing for the first time is you got a couple of things going on. One, is you got interest rates went to zero, right? So we think rates are going to start lifting and are they are lifting they continue to go up. That starts to favor broader assets. It starts to favor those companies that are early in the stages of an economic recovery, the cyclicality of that recovery, we call these cyclical stocks. This is something we've talked in our last conversations about. We see that group of cyclical stocks. These are your natural resources, your automobiles , those early phase recovery sites. They're starting to go, that's your cyclical. And then you're starting to see the value component, which has really been banks. Banks have just taken off. Energy stocks have taken off. That I think the market for the first time that I've seen in 12 years may actually be on the precipice of this regime changes, leadership change from these high tech stocks to these value in cyclical stocks, more cyclical than value. So that's how we're starting to position the portfolio. We're actually underweight in technology a little bit and more overweight industrials, materials, those kinds of early stage recovery stocks. And also the benefit is international. We see the emerging markets, as long as the dollar stays tame, it has been under pressure. It stays a little tame, that economic growth continues and emerging markets are in a real sweet spot. So, yes, while the way I've been wanting to answer for the long way is , we think we might be on the precipice of this change and it's probably been going on the last couple of months underneath our feet.

Natalie Picha:

And so when we look back at all of these tech companies and the expansion in the S&P 500 and all of that, that's been there. It's just high flyers . Do you think valuations are out of control? What happens when speculation leaves this market? Does speculation leave the market?

Glenn Royal:

It's never good thing! And you know, speculation is part of it. But making an investment case, all those things. But , you know, the question is , are we in a bubble? You know, that's where people are wanting, you're starting to hear, there are these tech stocks, these high valuations, all these things created a bubble. You can, we can argue, no , we're not based on the current valuation. Yes, we're at 98th percentile on most metrics in terms of valuation, but you have a zero interest rate environment, a very low interest rate environment that feeds into those valuation numbers, as long as interest rates stay low, then we can support these valuation numbers. We don't have any reason to believe that interest rates are going to go greatly higher the next few years. So we think we can still support this market. Could we bubble from here? Absolutely! There's no question about that, but I don't think we're here yet.

Natalie Picha:

Okay. So, we know the market's always forward thinking, it's always ahead. What sectors do you think still have the ability to continue to run right now? What's going to be favored there over other things? Potentially?

Glenn Royal:

Interesting. When you look at, I talked about this leadership changes, regime change from growth to value. Whenever these things happen, they have legs. Multiple year legs. One over the other. We'll see if this occurs this time, but historically they have. And that lie , I think even though banks have taken off , the financial service companies , energies looking a little attractive, I think to some extent, but I think the opportunity right now is probably still in those financials. And I still see natural resources, your basic materials, your aggregates and all those types of companies ought to do well , too . There's potential for a huge infrastructure bill. Better today than four years ago. When we first thought it was going to come. A year where there's a lot of interest in both parties. And what you've seen in politics, is a move towards the middle. So, the anything big that's going to happen has to have those moderates control. And we think that whole group is in favor of infrastructure programs. How will they pay for it? Tax increase on corporations.

Natalie Picha:

Well, and that sort of brings us full circle. We have to address where we are from a political standpoint, what that looks like for the markets going forward. We are having a change in the White House. So can you speak to that just a little bit?

Glenn Royal:

I just kind of hit on a little bit. It's that move towards moderation in politics? I go back to the Reagan years and if you look then whenever one party came into the White House, they had big numbers and their respective party is in control of either the Senator or the House. So wide numbers that gave that president a lot of power to do things. This time around, since that time, since Reagan, we've seen that kind of , almost instead of these wide advantages, they've collapsed. The last election, you saw the big pickup of Republicans in the house. They went from over 30 seat deficit to only 11 seats. If you look over at the Senate, the ones that are in control right now are the moderates, is the Mansion's out of West Virginia. Those are the ones in control. So, I'm not expecting big changes on tax policies, et cetera , that require broad. Cause I don't see a moderate Democrat in this will be wanting to do that in the Senate, but I do see things at the margin . So I'm pretty optimistic that what will happen will be favorable for markets, financial conditions, infrastructure bills, things like that. The tax changes that occur, we talk about how do you pay for that infrastructure program? You know, the corporate tax rate was reduced from low thirties, 32% down to 21. That was probably more than most people had expected. Lower than I think standing in the world and a corporate tax rate. So if we go back to that 26, 27, 28 range that still puts us competitive as a global basis. And it won't do a lot of damage to the market. Companies will be able to recover those earnings fairly quickly, I think from that tax hit. So that's not, I don't see anything on horizon that makes me concerned. What I see is a Congress and a White House that perhaps will calm down a little bit on trade rhetoric, calm down a little bit on certain conversations that are disruptive to the markets. And with the support of these central bankers and those politicians spending money. It makes you pretty excited about the potential for this year. I've joked with a few and I'm kinda serious about it too, is that I think we might be in the roaring twenties again, just a different version of it.

Natalie Picha:

Okay. Wow. Well, that sure wraps up a lot. I mean, it's hard to encapsulate 2020 in any one conversation. And then to even think about where we are starting out. 2021 has already been a little rocky, right.

Glenn Royal:

We made it five days.

Natalie Picha:

And the markets are holding in. Right. You know it's good to be optimistic looking forward. Still want to have some excitement about 2021.

Glenn Royal:

I do. I'm very excited. I, you know, and so the one caveat that really set me back this week. We've had a lot of things that we hadn't seen in modern times. You just saw the Capital situation. On the day of The Capital situation occurred, the market was up. Tell me that. Help me understand that. Myself, I've been doing this almost 40 years. I would never expected that. The market was up. And when we look at something called market breadth, that's a technical indicator that tells us how many stocks are setting new highs versus other setting new lows. And it's an important indicator. The wide dispersion of participation in the market, not just narrow markets, those are weak. Broad ones are strong. Market breadth is strong. On the day The Capital was attacked, 18% of the stocks in the S&P 500 set new highs. That's a strong number. The day after, when different thoughts we're talking about removing the President, 20% of the stock set new highs. Why is that all happening? Because it sees 6% GDP growth support from the government that's coming with the Democrat controlled Congress, more money than we would have expected. You just saw that whole issue around the paychecks at the end of last year. You're going to get your 2000, you'll get 1400 bucks. In addition to the six you just got. That's all coming. It makes us very excited about this year. So, I'm trying to contain my enthusiasm over here!

Natalie Picha:

Well, thank you. I appreciate these conversations so much. And I know that our listeners do as well. Glenn and I just want to thank you for listening to RHP Market Talk here at Royal Harbor Partners. We want you to feel confident about your financial future. You need a plan that offers a clear path forward. Financial markets and financial planning is complex, and we believe you deserve to have confidence that you have secured your family's financial future. We've devoted ourselves to our relationships with multi-generational families, helping them create successful legacies. We do this through one-on-one conversations that shape your personal wealth management and investment plan. Then we execute with ongoing support and make sure your personalized plan comes to fruition. Call us today or visit our website at www.royalharborpartners .com to start your conversation.

Disclosure:

Royal Harbour Partners is a registered investment advisor and the opinions expressed by Royal Harbour Partners on this show are their own. 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, investment 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 advisor to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.

Introduction
Economic Growth
Interest Rates and Inflation
Return of Value Over Growth
Market Speculation
Market Sectors
Move Toward Moderation
Excitement About 2021
Closing
Disclosure Statement