RHP Market Talk
Complicated economic topics distilled into digestible and palatable investing principles.
Hosted by Natalie Picha, Partner and CXO of RHP Wealth Management.
RHP Market Talk
A Red Sweep.
What drives the markets: politics or the economy?
In Episode 24 of RHP Market Talk, Natalie Picha, Chief Experience Officer, and Glenn Royal, CFP®, Chief Investment Officer, discuss the recent election results and the changes they will bring.
What implications do these changes have for tariffs, cryptocurrency, and the bond markets?
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 RHP Market Talk , episode 42, produced by RHP Wealth Management, an Independent financial services and investment advisory firm based in Houston, Texas. I'm Natalie Picha, partner in CXO, and I'm so excited to be joined today by our very own partner and CIO , Glen Royal . Good morning, Glenn.
Glenn Royal:Hi, Natalie. Good to see you . Glad to be here.
Natalie Picha:All right . Here we are post-election. For our listeners, if you had a chance, you heard our last episode, Markets Are Markets. Politics Are Politics, and we are now sitting post-election so much to talk about. So many headlines, a red sweep. We mentioned that in the last podcast. And here we are today with that red sweep to talk about what does it mean for markets and what really drives markets. Is it politics? Is it the economy? So this should be a great conversation.
Glenn Royal:Yeah. Okay. We'll , we'll see where we go with this. Yeah. Yeah.
Natalie Picha:Let's see where we go with this one. Right.
Glenn Royal:yeah. So, you know, one of the things we were talking about was that we're trying to distinguish between elections and the economy. And we were under the belief that the economy, you know, carries the game the day. Absolutely. And that's what happened. More or less, you know, the economy's still doing strong. You're sitting across the board, and it was good to go into that election with the pro- risk position on the portfolio. However, you know , uh, the red sweeps or blue sweeps, it really doesn't matter to either party. But when you control control of one party now , that's when things can happen. Particularly legislative things that require con gressional approval. Namely , you know, extension of tariffs Or tax policy changes, things of that nature, the spending p urse t hat Congress controls. So we're going to look for a little bit of changes in there, and that could be pretty drastic. This is , I think what the election told me more than anything is that we want change in this country, right? We want change. It was a red sweep, but all parties, all swing states, had popular vote. Yes . Everything. Trump won it all. So that's a mandate for change that he sees. And, I think we're going to see that, and that mantra will be called America First. So that's how we have to think about this as investors. America first.
Natalie Picha:So I know that you and I have talked about this in the past, is when you talk about the economy as a whole, or you talk about where do we go from here. You always point to the 10 -year treasury as that sort of your compass. Look at that. Yeah . Explain a little bit more. Why, why does that matter? What does the 10 -year treasury tell us?
Glenn Royal:I mean...it's, for better or worse, the reference interest rate that most of us use in markets setting mortgage rates or a number of things that go off that 10-year treasury. So it's a highly watched benchmark interest rate , that sets a lot of policy discussions, And it represents kind of that longer intermediate maturity part of the yield curve rather than the s horter end the feds in control of. So, I think that what the bond market did the day after the election told us a great story. if you read the bond m arket, the 10-year treasury is my telltale. It's about 4 44 on a yield right now, about 4.4%. The day on Wednesday, we saw that massive rally In stocks, that America first agenda, you saw private prison stocks do moonshots stocks like Tesla. Different companies just go through the roof. All affiliated with this new administration. But what we also saw that day was a sharp decline in the bond market. The long bond sold off by over three points that day. That's a very, very big move i n the bond market. And what the bond market i s was also kind of sitting back across the c urrent. There was some macro allocators involved in that b y stock sell bonds, s o some trading going on, But there still w as a signal that's telling us that deficits matter. And that started coming up in the last year. You're starting to see more of that discussion in the m arket. So the 1 0- year, if that yield spikes higher, closer to, say, 5%, I think that's when we're going to start having more problems in the equity market on valuations. A nd let's kind of go back to that. I've got a stock market that's on all valuation metrics, pretty much across the board you look at. It is running at record, you know, 90th percentile plus levels. It is all-time high levels on stock valuations, bonds, the 10-year treasury, yields, and interest rates that are part of the formula and present value analysis. So, to calculate the future value of that stock. So as that interest rate goes up, it declines the future value of that stock kind of offsets that. E xactly. Yeah. So as we start to see these rates go up and to, to try to, um, let people know deficits are an issue, uh, I think that that's what we, we call that the bond vigilantes. It's that term where, it really came out in the eighties where we had a period of the government was in the same thing after the Reagan years. A lot of deficit spending. I t got excessive. And the bond market started to tell you by raising rates. A nd, w hat that does i s it crowds out discretionary spending. That's a lso important for us, a s You know, here in the United States. S o, to do the various programs we do. So that's kind of where we're at now. Will that continue? Will the bond market, you know, pretty much control excessive policies o ut o f the federal government, that it may not inflationary policies such as broad-based tariffs or mass deportation o r economists that are concerned that that would drive our c ost higher? But again, at the end of the day, we don't have a plan. Nobody knows. There was never a plan by the Trump administration exactly what they were going to do. So stay tuned. We will all find out at the same time. right. We do know that you're seeing movements in h is cabinet picks that are, y eah. A nd, and what's interesting, you know, look, these are t hese, some of these folks are s u are qualified, you know, they're, they have t heir, t hey're beliefs t hat t hat true to the Republican party principles that we have today. But they're really good at what they do. And so, I wa nt t o s tep back and say what, you know, what can go wrong as t he bond market thinking th at o u r d eficits are getting ou t of hand and interest ra tes s pike and it j ust, th ose e verything off, right? That could go wrong. But what can go right is that we are able to, that they're able to pull this off. We are in a situation where if tariffs are targeted and strategically used to where we're not sending American cash just out of the country all the time and not bringing some of that back in, I think these tariffs can possibly do what the administration's trying to do, which is balance out fair trade. But, yo u k n ow, I wa nt t o g et real with it a little bit. Really, what I think it's about is trying to contain the militarization of China. We keep sending them boatloads of cash every, wi th o u r t rade deficit every month. And they have, y ou know, increased their military-industrial complex. And so I think a lot of this is also the recognition of the threat of China to the United States, the perceived threat. And so you're seeing a lot of economic, u h, to ols being used to bring everything back to this America first forefront to strengthen America defenses, our weakness in semiconductor, u h, ch ip manufacturing, all these different things. We' re de pendent upon an island in Ta iwan tha t pr oduces the worlds tha t se miconductor chips, the most powerful chips we need tha t ha s no military. That's just a short, you know, boat ride over from China. And we've already seen all the sab er ra l lying. S o, some complex things are going on that are beyond my understanding. But I see these things happening. And so I really think that we probably have a position where thi s ma rkets can go higher as we repatriate and we do this reshoring, nearshoring, all these things that are going on. Probably some of the projects, the Chips Inflation Reduction Act, different things are in the Biden administration. I don't think they're going to be necessarily, you kn o w, s tricken day one with the pe n . B ut I think there'll be changes to them, and there'll be adjustments. because some of those things are pro-growth policies here in the US th a t th ey're doing, investing that money. So, I see more of that continuing. And I'm, as an investor, I am concerned that international stocks, you , y ou've seen the performance of that in the last week. They've just hav e re ally struggled versus the us Ri ght. And I think that's probably going to continue, Natalie; I think you're going to see more of this America first and re-distribution of su pply chains that's already been happening the last several years. I think that continues. And now you have an administration that's experienced that knows how to do it, unl ike th e first time. And I think they're going to do a lot of things. And th at could be where we have I mean, look, if, if you're voting for your pocketbook, you're probably going to do okay.
Natalie Picha:Um, so, like, I just want to circle back around to the question of tariffs and something that we talked about last time and what those tariffs could do longer-term, right? To the overall economy. When we talk a little bit about well, inflation and, and how that, how that all interacts, right? Because it doesn't all get repatriated immediately. It's not like you can bring it all here day one, right? It's going to take
Glenn Royal:Some time . Yeah, it does. There are disruptions in supply chains, and that causes inflation. You get something like that on the border of Mexico with tariffs there; some of those automobiles go back four and five times across the border for their parts to make it right. You know, that'd be four or five times the levels of tariffs. So I think that kind of tariff is probably not the best move. But if it's more strategic like we traditionally use tariffs, and maybe a little more broad-based, and if we're concerned about competitive threats from China, then I see they'll still do that. The long-term consequences are the bifurcated system in the country where you have the east and the west and, you know, dual supply gains and defense mechanisms and all that. So you need to talk to a political scientist, let's say a little bit more on that. I'm just, you know, spitballing that, and I don't know ,
Natalie Picha:We know now the tax cuts really are on the table, right? All of this , particularly the corporate tax rate yeah. That's , that's probably going to get done. And you know , what does that, what does that mean?
Glenn Royal:Yeah . Well, it drops right to the bottom line, and it makes earnings go higher. So I get this situation again, let's go back. I got a 90th percentile plus record-level valuations on the stock market. If I get that kind of growth and that earnings and that starts pushing that and and that growth, that will start to go higher so that we grow the multiple and, and really multiples, all these valuation measures. They're really, they're more, to me, they're like a barometer. They're telling me that the markets are a risk on, they, they're fully valued because they see an opportunity here. Now, what that does is that it leaves very little margin for room for error. If you make a mistake, you're as quickly down. But this enthusiasm that we see in the markets , we may get a little bit of short term profit taken here and there. Because it's kind of got strong out of the box. But I think that continues. So I'm not, you know, what, what I don't know is, is if the retaliatory tariffs become so extreme, and we get in one of those situations of trade wars back and forth, that it basically blows out all of Europe's corporate profits. And you see China, you now think about this coming into this administration, this new cycle. It's a whole different setup . China was in a growth phase , uh, eight years ago. Right? It was growing. It's declining. They're trying to do programs that stimulate their economy. So China's not in the same situation. You also look at the setup ; the federal funds rate when President Trump took office was about three-quarters of a percent. Today, it's four and three quarters . Deficits are at record levels. I had the PE multiple price attorney , multiple S and P, around 17 times when we took office the first time, right ? It's 26, 27 today. So it's a whole different setup . And that means there's no margin for errors. Very little margin for error, because We'll go to the valuation side and sell out that there's a mistake. We'll look at that real quickly, And it'll be the bond market. And why does the bond market really matter? Because if we become a higher debtor nation , our deficits keep exploding. And what do we really want to watch? I told you about the 10 years, but I would also watch the quarterly auctions; the treasury does monthly auctions and see how they go. Is that bid to cover ratio? There's generally over two times the amount of demand for our treasuries. But watch the foreign demand, does that start shrinking watch, you know, the domestic demand, if they're able to transfer that support of our debt and keep around 5% and all that, we we're growing, we're doing pretty good in here with rates to where they are. If they can keep it around this level and not tip blow out above five, then I'm very encouraged about economic growth and and earnings for, for Profitability of corporations that should lift stock prices. Yeah . So there's, there's a lot of things here, but what we're talking about is a massive change to the United States system that we've not seen opportunity, you know, all the things with it , unforeseen consequences , we just don't know yet the unknown unknowns. Not unknown .
Natalie Picha:Well , no , I think we've got a lot of , something else that we know is probably on the horizon is a lot of deregulation. You've seen crypto spike way up, right? It's hit record highs. Um, there's some discussion about the new Department of Government of Efficiency...Doge, right ? Yeah. And all that, I mean, there's some pretty, pretty big things possibly out there. And , again, it's unforeseen, but you know, there are unforeseen consequences. Even there, there's a fine line between too much regulation and not enough regulation.
Glenn Royal:Well, we live in an area that has to deal with regulation. We have to deal with it, and we know when excessive regulation is frustrating and bad . Yeah. So I think there, there, there was a , uh, I think in the Trump's first term, he was trying to remove two rules for everyone . One of those things. He's trying to go like a 10-to-one ratio now. He's really coming in on deregulation. So you look at , uh, industries like energy. Energy should benefit from deregulation. However, that doesn't , as we talked about before, that does not mean that the stocks will go hard. The economy and the stock market are two different things. Yep . And so you can see based upon demand, well , right now, oil's, you know, you have some pretty hot spots going around the world, and oil's declining. You know , you put gas in your car lately , you know, it's pretty cheap. Fill up your car right now so that deflationary pressures are really there. China's slowing down. You're seeing oil. You're seeing all that happening at a time you're about to maybe throw a little growth. Maybe that helps. I don't know, but we'll we'll be watching that. But again, I'm watching that five-year treasury, a 10-year treasury, or my telltale to see what bond risk happens to equities. And I'm watching those auctions. I want to see how well those auctions are received. If our debts are received well, things look good, you know, where we go. So I don't know about the societal issues and all that, you know, the democracy issues and all that, things that people are worried about. I put on the blinders in politics and just focus on, you know, profits and economics. Yeah. On the markets. Right . Right. And right now, we're pretty good. Yeah .
Natalie Picha:Do you have any thoughts and or comments on the crypto and where we may go with that? Because I know we've talked a lot about it, and we've had clients ask us about crypto multiple times. Right? Again, it's the wild, wild west. I think that's the way you've described it in the past. And what does that look like? You know,
Glenn Royal:You know, it's...they have an ally now in the White House pretty sure SEC chair Ginsler will be, you know, who's been a n anti-crypto antagonist. He's likely, you know, gone or muted in that response. So it's created so much excitement and enthusiasm in that crypto space of the, the people adhere to it. They see a greater use for it. The day you can pay your taxes, US income taxes with crypto will be the day; I believe that's arrived. I don't think you can do that right now. So the use case of it makes it more like a collectible like gold in a way because there's a finite amount, you know, the reduction in the having all that stuff that they do. So it's a finite amount, but it's become a collectible. And , in that light, you saw a big surge—partly a little uncertainty. You saw you've seen gold increase as well in the last few months, though I noticed I did see gold underperform stocks last week. On that election news, it gives me a little bit more encouragement that the market's favoring the economy over gold. But that's what it is. I think it's basically become a gold alternative, which is digital gold. So it's a collectible like that. It's certainly a large, tremendous market that it's grown into. So I don't think it's going away, but I would look at it just like gold is just a , perhaps foreign , you know , some type of risk in the system and inflation risk , whatever people are trying to use it as that store. So I think it's interesting to watch. I think it's going to , you know, it's here, it's not going to go away. I just don't know the base, the case utility of it. I don't know how to buy gas or groceries. With it, You know? Right . I still depend on the dollar. So we'll see how that shakes out. But it sure has created some excitement in that space. And I love watching it. It's very exciting to see. It's been kind of neat to watch. And I wish them great success, you know, however they pull off . But I don't see it at this moment being an alternative currency to central banks, You know, treasury to of, of countries. Right. That would be running a fo of what they want to do.
Natalie Picha:There's been some other things kind of out there in as far as the numbers coming in and also kind of headlines and, you know, where is the, the typical US consumer right now. And we're seeing that the, you know, individual debt is going up. And so we, we've had a lot of kind of extra cash kind of on the sidelines for a while. But we're starting to see those numbers for just the regular US consumer. That debt, that debt number's going up. So we talk about a little bit about deficits over there and kind of concerns there. Any thoughts around, you know, how is the actual US household fairing? Right. Just start
Glenn Royal:So I would. To me, that's an indicator of confidence. You know, when you take on debt if you feel secure about your future or if you're in a lowest income and any debt to survive, tote your note places and all that stuff. So that group's just getting decimated. The higher interest rates are all that's crushed them. And that's why I think there's so much enthusiasm about America First policies. Because they may draw , they should drive greater employment in this country. Particularly if I get mass deportation of illegal immigrants out this country , uh, we're going to have to replace those Jobs. Or that would be inflationary. Right? You'd have To, and I'm already seeing it. I can tell you this is already going on right now. In the construction trade craps, different laborers that , uh, are seeing that the illegal aliens are now, you know , out of that trade. They're leaving, they're raising their prices because they can't, there's nobody else left. Right? Right . You're not going to easily replace those workers. So people are, it is starting to kind of happen at the margin. And I , so I, that's something we have to watch and see how immigration is, and then frankly, you know , I don't know. I don't know. Because we don't have a plan, that's where I keep coming back to, where we don't have plans. There's nothing in front of us. I'm pretty sure Robert Lighthouse .
Natalie Picha:Yeah. There are no policies in place yet.
Glenn Royal:No, I haven't seen a plan that says how they're going to do mass deportation on day one. How are they going to pull out of Ukraine on day one? I haven't seen anything. No one has because there are no plans. There Never were in the campaign. Yeah. Yeah . So we are in a situation of focusing on the 10-year treasury that will give me an indication of what's happening in the market. If those yields spike higher, five or higher, we're having problems in our economy, most likely, unless there's something else going on . But most likely a general statement. So watch that. If it hovers in here, four and a half, five comes , stays, I'd feel pretty good about it. And, so what we're doing in the bonds, I know we've been so big on bonds and throughout this year, pounding the table on bonds. Right. And I still love bonds. I still think they serve an extraordinary purpose in a person's portfolio. We did see an increase in the yields, and prices sold off as the market started to perceive that Donald Trump was going to win the presidency again. It started doing it three or four weeks earlier. You all the trades started going on. So, the market snipped it out. It's pretty interesting how the market can pick things out like that. Right. So anyway, I'm kind of...I'll let that, I'll let that one be figured out by others.
Natalie Picha:Cautiously optimistic.
Glenn Royal:I am. I am. I...so, I mean...I really don't have policies that I'm going to be waking up or getting off work, and there's going to be a shot across the bow , just like last time. It'll be, it knows, but I think this what's different this time for at least for professional investors ; we were confused by the first time dealing with President Trump because that's, I mean , that's part of his business strategy is to keep you a little off balance . Works for him. But it's harder to do in a US economy, right? The US government. But that's what we're dealing with. So, I will focus on my key indicators, which tell me what's going on. And I'm going to turn off what I'm hearing in my head all the time. You know , remember it was daily. We were hearing President Trump.
Natalie Picha:No . We always talked about trying to filter out noise and, really, focus on data.
Glenn Royal:Yes. So that's really what I think is more important this time. I think everyone's a little bit sober-minded about it. We'll see how the Senate handles the confirmation of these cabinet members. Some of them are, you know, questionable, and you know, what the press is saying. We'll see how they handle that, but I don't know how it will go. I have a very, I have a government that, you know, you go to the Republican party in Congress, you got three factions in the Republican party. You got the warhawks. You got the free traders ...look kind of like me. And then you have the socials, you know, Societal issue , people, social issues, And they're in charge right now. Right. So the warhawks in the free market folks are pushed to the side, but they're there. So to think that congress is going to run smoothly or the House of Representatives or even the Senate with a very slight majority, you know , that's going to be interesting to watch and see how this plays out again. Right . So we so
Natalie Picha:You really see how much gets done and how quickly it gets done. Right. Yeah .
Glenn Royal:Yeah . I think people, you know, I go back to the competitive threat by China, both on a military and an industrial basis. And I think that everyone's kind of lining up behind that. I've seen more and more talk in the last year committees that I'm involved in here in the Bay Area with militarization, you know, understanding that we're falling behind. So I think a lot of that's going on. It's a national security issue As much as it is a trade issue.
Natalie Picha:Well, as always, interesting conversation, you know, for our regular listeners, if you get to go back and listen to previous episodes, you know, it's interesting because our election episodes from four years ago still get downloaded and listened to. And , when we have large market events, you know, we go back, and we listen, and around here, we're just pretty authentic, right? W e're s aying what we think and all of, I'll use our, one of our compliance, right? Everything said here is just an opinion, right? R ight. Y eah, y eah. Of what we see. But data-driven, you know, I know the Fed's kind of caught, caught a lot of. F lack for just being very data-driven. But at the end of the day, we can look at that. That's what we can see. And we have to really k ind o f lean on that. And that's when we say politics or politics a nd markets o r markets, right? We're looking a t data.
Glenn Royal:Yeah. That's why the economy and the stop market are two different things. Yeah . Right ? We just behave differently. So, I have probably had eight hours of sleep since last Tuesday's election. I mean, I'm just all night, I'm all up, and I'm staying on top of this stuff. But again, I just want our listeners to understand that we could be in a very good place , uh, the possibilities here . You finally have the muscle and the willpower to reduce the scope of the size of the federal government. Cut some of that spending down, maybe pay down this deficit. Get a little pro-growth policies in here. And things look pretty good. I've crossed my fingers. But watch that 10 year s; that'll tell you that that that call's wrong. That 10-year spike above five . Watch that. Right ? I'll leave you with that. TNX, that's your Apple, Android. Put it on your phone. TNX. Watch that for the next few years.
Natalie Picha:Well, Glenn , as always, these conversations are really the highlight of our month. We get to...we do a lot of work, but this is...this is always kind of just the fun part. So thank you so much for joining me today and sharing all of this, uh, with our listeners, and to our listeners, please take a moment to subscribe to RHP Market Talk . Leave us a rating and review. You can also find us on LinkedIn and Facebook for additional content, which includes our Market Minute. And if you have any questions or want to discuss today's topics, please contact 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're 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.
