RHP Market Talk

A Recalibration.

• RHP Wealth Management • Episode 40

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The recent 50 basis point cut in interest rates was another encouraging sign that the US economy is continuing to grow, but how will this affect everyone's finances?

In Episode 40 of RHP Market Talk, Natalie Picha, Chief Experience Officer, and Glenn Royal, CFP®, Chief Investment Officer, discuss the recent interest rate cut and an intriguing market conversation about where the economy goes from here during an election year.

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

Natalie Picha:

Welcome to RHP Market Talk , Episode 40, produced by RHP Wealth Management, an independent financial services and investment advisory firm based in Houston, Texas. I'm Natalie Picha, Partner and CXO, and I'm so excited to be rejoined today by our very own Partner and CIO, Glenn Royal . Good morning, Glenn.

Glenn Royal:

Good morning, Natalie. Good to see you .

Natalie Picha:

Ahh! I'm so glad to be sitting down and having this conversation. So, for our listeners out there, first of all, this is a little bit of a fun thing. Today is episode 40. So we've been doing this for a little while now. It's a great way for us to get information out to our clients, their friends, and family...about what we're thinking about markets and where things are. And this was a big week. We had a Fed rate cut...this week of 50 basis points. We've been talking about this coming all year long, and it finally happened. And so we've got a lot to talk about today. So...

Glenn Royal:

It's also a big week for RHP.

Natalie Picha:

It was. That's right. That's right. Last night, for some of you, I hope you had an opportunity to join us. We had our five-year anniversary celebration. So, June was five years for RHP. You know, if you get a chance, go back and listen. We have an episode out there about The RHP Story. So, you know, we left Merrill Lynch Bank of America back in June of 2019. And it has been a ride! The five years. And we're just so grateful to our clients. Our community leaders. The professional partners that we work with that help to serve our clients every day.

Glenn Royal:

They do. They help us every day.

Natalie Picha:

Oh my gosh. So last night was so much fun. It was just to see the faces in the room. It was really cool. And, um, if you're listening to this and you have not been part of one of those celebrations, I hope you'll join us in 2025.

Glenn Royal:

Please do.

Natalie Picha:

We do different things all year long to celebrate what we do. And our clients and who they are. So, okay. Well, let's jump in here. Let's talk about the fed rate cut of 50 basis points. And I think I'm still hearing rumblings out there of recession. No recession. Soft landing. Not a soft landing. And you kind of said it yesterday; you're like, you know, they might have stuck it. So, what did you mean by that?

Glenn Royal:

Yeah, so, Fed Chair Powell termed this in this press conference a recalibration. And it's a recalibration of interest rates, not so much because we're concerned about a recession. Two terrible loss of jobs. It was just more to kind of knock off a half a point at this level of rates. And I think the benefit was probably for the people who are getting hurt the most with the sharp increase in rates of lower economic class...labor. So it's things to help that group, get them a little assist. And kind of keep this going, but it does probably increase our opportunities where this economy doesn't tilt in a recession. It just basically continues to grow. And we can talk more about the signs we're seeing, and it gives us some encouragement about that.

Natalie Picha:

Right, right. The data points still show that the economy is very strong. We've had a little bit of an uptick.

Glenn Royal:

3% GDP.

Natalie Picha:

Yeah. We just went through Covid in 2020. Right. That was a massive...massive shock to the overall system. And so I think there's still this little bit of are we really okay? Is everything kind of back to normal? And I always remind people of a 0% interest rate world, which was from the financial crisis of 2008; that's not normal.

Glenn Royal:

Right. That was an abnormal period. Right. Now we're more normal in rates.

Natalie Picha:

Right. This is actually a more normal period than before. So, what do you think the Fed rate cut of 50 basis points is going to be for personal finances? A big thing is that, you know, we've had talks with clients recently, um, over this last year...year and a half...with their emergency funds, making sure that those are in a money market or high-yield savings account. Right. Because before, it earned you zero or, maybe, it earns you 0.1. Right in the last year and a half, it's earning you four or 5% and so making sure that even those funds that are just your liquid funds are doing something. Tell us a little bit about what you think about money markets as a whole and what we'll be looking at because rates are now going to come down.

Glenn Royal:

Yeah. So as investors declining interest rates increases the value, the principle value of our bonds. If I own a bond with a higher coupon, then what's currently being paid? Right. So, new issues are issued at a lower rate. I think that, really, that you're in a situation where the shorter end, shorter maturity is out to just a few years, are super sensitive to what the Federal Reserve does. So that's where your money market rates are. They're in that shorter end of the maturity. So, as the Fed increased rates like they did. Coming out of the, you know, the inflation boom we had out of the pandemic, you saw money market rates go from a quarter to five point half percent.

Natalie Picha:

Right.

Glenn Royal:

They'll come down just as quick as that fed continues to lower rates. And we believe that the terminal rate, the end rate that the Fed will be, they'll cut another 1.5% between now and the end of 2025. Probably get another half percent this year and a percent next year. Meeting every other meeting gets a quarter of a point that gradualism. So it's kind of like the gradualism could be some deflation of the air out of the, you know, rate. And it just gradually comes down. So you're just slowly...and what that does is... If I'm a fixed-income investor, besides credit risk, I get my money back; the other thing I have is called reinvestment risk. So I get this neat cash flows, and my bond matures, and all of a sudden, the Fed has cut rates, and that bond I was having at five is now I reinvested a three and a half percent world. So I reinvested lower rates, much of what we had done...gone through probably for 30 years...coming out of the eighties, which drove equity prices.

Natalie Picha:

Exactly. Exactly.

Glenn Royal:

And now we're normalized. You've got the ball with it and the chop and all that and the equity markets, but that's just normalization.

Natalie Picha:

Right. That's right. Normalization. When we were Right. I'll just jump back to Episode 39. We were talking a little bit about is tech going to continue to carry these markets? I mean, mag seven was all the rage. I mean, quite frankly, we keep hitting these all-time highs, in the market. And we just saw a lot of concentration; a lot of that growth was primarily in the tech space. So let's talk a little bit about...Now, as earnings have started to come in. What we're seeing in terms of tech is that it is still all tech. Are we broadening out this market? What does it look like?

Glenn Royal:

Yeah. Um, you know, tech is, you know is part of the DNA of the United States...

Natalie Picha:

It is. It is.

Glenn Royal:

It's not going to go anywhere. It's our largest sector in the S&P 500. You've got to own it. But what we're seeing, you know, our AI theme is real, we know that it's been the dominant player for the last two years. It's probably kept the equity markets going and the absence of other drivers. But we are starting to see where investors are now asking you for a return on that AI spin. We want to see the monetization. You've been building it out. We're in a phase right now, and that's going to take a little bit of time. But I think the AI-dominant players probably have a couple of years of runway before that competitive landscapes get a little bit more, and things come into that future. But what I'm really fascinated about is the enhancements in productivity that AI is generating. And that's really, really important because productivity allows us to have growth that, you know, without inflation. A more real growth rate and, by enhancing productivity, not necessarily replacing jobs, but...I'm going deeper here. I'm sorry. But technology, the four big waves, and the first wave was the internet. You know, it came into the office space. It went into the workplace, and it enhanced our productivity at work. Going from IBM electric typewriters.

Natalie Picha:

Right. Right. Right.

Glenn Royal:

And then, the next wave was cellular, and all of a sudden, it was mobile. I could take it around this technology in my pocket. But I didn't have the place to store it, the data storage. So, the cloud came about. Those were the big three advances we've seen so far. AI is that fourth and its intelligence. So, I now have the ability to access intelligence on demand to help me with decision-making. AI is becoming more and more prevalent. We'll see that grow. And we're in the early stages of...

Natalie Picha:

Infancy...infancy. It's very much an infancy.

Glenn Royal:

This whole game...Just like we were on the internet. And I joke around here that in the first years of the internet, the first decade if you got some piece of hardware that was the internet, it didn't work. It took you forever to try to fix it and get it to work and all that. So we're kind of in that phase. But it will evolve. And this is really fascinating, and I'm very encouraged about AI in the sense that I think the productivity gains really set us up for a very, very good economy. For really a number of years. It's, it's a big deal. The other side of that, you know, kind of infrastructure is another play that we have on that. And that infrastructure is not only because of the reshoring and, you know, the things nearshoring that's coming back because of the changing global trade situation. But you know, it gives me the access to AI data centers. You know, building those things out. All, all this that's coming. The demand on energy and electricity. The demand. So those are all thematic areas of the market we see. And now those are areas we've invested in. And really shifting the portfolio. While I like the tech and I like the AI, I'm seeing because of the Fed cuts. It's starting to broaden out, and I'm seeing earnings growth from the rest of the market. The 493, right?

Natalie Picha:

Yes. Exactly.

Glenn Royal:

So, you know, it's all been about the mag seven. Now, we have 493 earnings. We were in the 493. We're supposed to come in like 4% this last quarter. They came in at nine. Higher than expected. Just a double. So with this cut, I start get that broadening out. We're moving the portfolio more diversified away from that heavy mag seven. I'm not going to avoid it. You guys still own it. It's a big part of the portfolio. But I do think opportunities now are elsewhere. Mid-cap. I can talk a little; I'm going to give you a little soapbox account in small caps. There is a correlation; whatever the Fed cuts rates, lower interest rates benefit small caps. Because these are small businesses that are you know, they need the cash flow with the business. The economy does well. And the cost of business things have changed in that space. I know everybody pounds the table on small caps, and they will probably do well because of the correlation. Well, we understand that. But private equity has come in the last two decades and just bought all the best companies. They get picked off first. You know, in years past, they came to the public markets, and that's why small caps were so great. You were getting these wonderful businesses. That you could grow with as infants, now, that's being taken by private equity. You don't get them until they're a big behemoth and they roll out. So, I'm kind of cautious on the small-cap space. But it opens up the mid-cap space. Same trades, same thing. But these are publicly traded companies that have been in the market. So that's another area that we're really quite interested in beyond the Mag seven.

Natalie Picha:

Yeah. So a lot of change. A lot of change on the table right now. I mean, it's interesting because I think transition is a word that we've seen since COVID. Like every, it's just everything...

Glenn Royal:

Yeh. It became a dirty word, didn't it?

Natalie Picha:

It really did. It's like, oh...

Glenn Royal:

...transitory .

Natalie Picha:

Everything's transitory. Right? Right. So I'm going to talk, probably the thing at the top of everybody's mind. I know we are watching the Fed this week, but we're in an election year, and we had a wonderful event with BlackRock as our guest earlier this year, who came in and just did appreciate a really deep dive. I mean, lots of great stats, lots of great graphs. If you know us around here, we like pictures. So they, they came and did this presentation all about historically what does the market do and how does it perform when we're in an election year. So here we are; we're just a couple of months away now. I still think it's a bit of a surprise to people when we say, you know what, historically, markets don't do that bad in an election year. You know, kind of, here we are; we've had a great year so far. What are we thinking in terms of this being an election year cycle? Where do we go from here?

Glenn Royal:

Yeah. I know...every day, right?, I like questions. I think BlackRock was spot on. When you really, what matters is earnings. Inflation. The numbers, the economic cycle, that's what carries. But we also are in a trading world. So, the trading aspect is that we get closer to the election. And this election is what, 50/50? I don't know who's going to win. I don't have a clue. So that uncertainty creates kind of a risk off for investors. We don't like uncertainty. So, we could see some maybe choppiness in the market coming into the election. I kind of see three big periods set up. You got the end of the quarter. We're going to be finishing up that little bit of the earnings period when we get into, you know, the third quarter earnings. But then I have the election to get through. And then once that's cleared, we got into the year, and things look pretty good. And that end of the year looks like it could be a pretty good setup. But I need to clear the election first. So I wouldn't be surprised. A little volatile, choppy, sideways hype. Until this uncertainty is cleared.

Natalie Picha:

Right. Well, and, one of the reasons that you know, BlackRock noted, and then if you just look at the historical charts, the reason that typically markets don't do pretty well don't do badly in an election year is because the market doesn't like change. And so, while we're all focused on the election, right? Market can do what the market needs to do and we're not going to have any big upheaval. Which if, again, if something changes after the election that, you know, the market has to kind of digest that information and go, okay, well now where do we go from here? Is it tax cuts? Is it tax hikes? Is it, what is it? Right.

Glenn Royal:

Yeah. And that's, you know, that's the trade. So I, you know, if I put my trading hat on. You know, and, just in the short term trade, if it's President Trump is re-elected, stocks are going to go up because of tax cuts. Then, you know, the market will deal with it later

Natalie Picha:

Later Right.

Glenn Royal:

But boom. And, and the other, if I think if we get a Democratic sweep, the market will look at, you know, tax increases and probably sell off on that. So that's just me, and that's trader speculation.

Natalie Picha:

Right. I was going to say that's short-term. Like that's just the short term term trading. And I love what you'll always say around here, like, don't trade the news. Don't trade the news. What's news today? Right. Something else could, something else could change tomorrow. Right. It keeps a really good focus on the fundamentals, the real numbers. Right.

Glenn Royal:

And when we come back to that. 3% growth, 4.2% unemployment rate... employment rate—excuse me—I've got a Fed that's friendly. So pretty simple: When an economy is strong, you buy stocks. When it's not, you don't buy stocks. The economy is strong

Natalie Picha:

Yeah. The economy is strong. So things are looking good. Well, you know, every time we have one of these conversations, I feel like we're taking a minute to really just digest all this information that's out there—and trying to bring in the conversations that we're having with our clients. And what you're seeing in the economy and the data. And it's always fun to see.

Glenn Royal:

Yeah, you know, it's a big variety.

Natalie Picha:

It's a big variety. So do our listeners out there; I hope we keep you entertained. Because we kind of go all over the place with these things.

Glenn Royal:

It's as entertaining as this stuff can be.

Natalie Picha:

Yeah, that's so true. I mean, we find it...,

Glenn Royal:

We find funds probably out...

Natalie Picha:

We find it entertaining. I don't know if anybody else finds it entertaining. But we do. And we do appreciate all of you guys out there that are loyal listeners. It's really great. So before we sign off here, Glenn, did I miss anything? Is there anything else you want to talk about?

Glenn Royal:

So I'm going to take you one little more thing on the bond market, and then I'll be quiet. I always do. And then it goes on for 20 minutes. But, in the bond market, we are dealing with the potential for deficits. That is politically one thing I'm not hearing from either party is any talk about deficit control. It's just that we're just not hearing it. So, in our bond portfolio, at least, our thinking is, that we want to be placed in the maturities range that is controlled by the central bankers. And not controlled by politicians. So, our portfolio is the duration we measure the sensitivity, which is a little shorter than the benchmark. We're about close to five. Benchmark like six and a half. But it's really because I'm in that spot where the Fed controls, and I can benefit from lower rates. I'm not going to be exposed to higher rates, and there's, you know, different technical stuff involved. But that's kind of where I want people to know. And so I think we've had the big move in the yields a a big draft. That's come down. We benefited from that from the last time we spoke. So, look for yields to go down gradually, but I don't expect sharp moves. I think this is just going to be a gradual ride. And that's what the Fed wants, dependent upon data.

Natalie Picha:

Right. Right. No, I think that was a great point. Thank you for adding that. We definitely just...and for clients out there that are getting closer and closer to retirement. Or already in retirement, this change in interest rates, the balanced portfolio has that...

Glenn Royal:

It brought it back.

Natalie Picha:

Oh yeah, absolutely.

Glenn Royal:

I mean, it was dead. DOA, you know. It, the TINA, has no alternative to stocks. We went from TINA to TARA. There are reasonable alternatives. Yeah. Right. And so, you know, that fixed income component of that steady cash flow that it just generates, it allows us in planning to meet your spending needs. So, if I can build a bond portfolio, the cash that it generates with today's rates will be able to meet your standard of living needs. Then the equity portion is like; I get a bonus this year because the market's boom. I may buy me a car or whatever, or are the markets are down this year, but I have my standard of living covered because my bond portfolio is covering that. That's how I see it. I'm not approaching it as some Wall Street gurus trying to tell you that you need to throw alts and, you know, stock bonds and all that stuff. I'm just approaching it as a family that has real budget needs, and are we building these portfolios that take care of those families?

Natalie Picha:

Yeah. Right. That's right. Well, thank you, Glenn, so much. I hope all of our listeners out there hear how much we care about you how this affect you as an individual? That's where our heart is. And so from the planning all the way to the portfolio construction and the management of that. What we're doing is we're bringing all that together to make sure that you are taken care of. So thank you to our listeners that are out there. Thank you, Glenn, for joining me today. Please take a moment to subscribe to RHP Market Talk and leave us a rating and review. You can also find us on LinkedIn and Facebook, and you can find additional content on our website. And then Glenn does our Market Minutes periodically. So there are Market Minute videos out there where he's going to share his market and economic insights each month. So, 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 you've already taken steps towards your ultimate life goals, we are here to guide you. Experience the difference of working with a firm that empowers your life. A firm that focuses on what matters most to you.

Disclosure:

Royal Harbor Partners is a registered investment adviser, and the opinions expressed by Royal Harbor Partners on this show are their own. Registration as 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. The 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. The 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.

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