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
Navigating 2025: Market Surprises, Federal Reserve Shifts, and Investment Strategies
Discover the surprising twists of the financial markets as we kick off 2025 with an essential conversation featuring Natalie Picha, Partner and CXO, and Glenn Royal, Partner and CIO.
Explore why the market is defying expectations with rising interest rates despite Federal Reserve cuts and how a new administration's policies could shake things up. We'll dissect the recent end-of-year sell-off and early January market movements, all in the context of inflation and high valuations. With "America First" tariffs and potential new tariff policies on the horizon, we promise valuable insights into their possible impact on inflation and market stability.
Plus, learn why bonds are shining as a cheaper alternative in a richly valued market, offering you a potential safe haven.
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 43, produced by RHP Wealth Management, an independent financial services and investment advisory firm based in Houston, Texas. I'm Natalie Picha, partner and CXO, joined today by our partner and CIO, Glenn Royal. Happy New Year, Glenn.
Glenn Royal:Happy New Year, Natalie. Good to see you, always glad to be here.
Natalie Picha:Oh yeah, here we are. This is our first podcast of 2025. Super excited to have all of our listeners here and excited to kind of jump into this conversation. As always, there's a lot to think about and talk about, but, of course, with an end of year sell off and a little bit of a pullback here at the beginning of the year, we've got a new administration coming in and certainly going to have some policy changes.
Natalie Picha:We have a lot to consider in this market, so can't wait to hear your thoughts. I know you and I have already been kicking around some things. You've been sharing some ideas. Also want to mention to our listeners that, if you did not catch it, glenn put out a market minute just a couple of days ago, so go find that on our website, on our social media channels. It's a good two to three minute overview of what we just saw in interest rates and bond markets. So, with that, love to hear your thoughts on the volatility we saw there at the end of the year. And then that just pushed us right into January and this morning we're recording this. On January 15th we had a CPI print, so let's go.
Glenn Royal:Yeah, it's still about inflation, isn't it? It's always going to be about inflation, and that's kind of what we're dealing with, have been dealing with since the COVID began. We're kind of at that point, Natalie, where we're in that last mile, that last March, which we all thought was going to be difficult trying to get down to that Fed's 2% targeted rate, which is a challenge. A lot of things going on, but the prints did come in a little bit better than expected, and one of the things you see in markets like this is something we call main reversion Whenever something gets too extended on one side, you might get a news event and then it brings it right back. So it's also a good till to understand about the importance of staying invested for the long run, because you just don't know how markets are going to go. That being said, I expect a lot more volatility in this year. So get your tennis shoes on, we're going to be running around.
Natalie Picha:Yeah, well, I think you know a lot of people have heard us talk about the Santa Claus rally before that end of year rally. I keep reminding clients that keep telling me how bad things are, that we're coming off of two back-to-back years of extraordinary gains in the equity markets and it still sometimes is not a mental. You know, mentally it still has not sunk in. So, even with the decline in December, you know we finished up 2024, right at what? 25, 26%, like that's. That's extraordinary, right. And so people have asked, clients have asked well, what happened in the last two weeks of December? What was that?
Glenn Royal:Yeah. So I think a lot of that is we've talked about this before how markets don't really like uncertainty. So when we came into middle of December we had another Fed cut. Remember that it's hard to remember this, things happen so much. So when we came into middle of December, we had another Fed cut. It's hard to remember this, Things happen so much, so quickly these days. But the Fed did cut by a quarter of a point. That was their third cut for the year of 2024, their final one, and it took federal funds rate down 1% from where they began.
Glenn Royal:The irony is, or the baffling part of that, is that you saw actually interest rates increase when the Fed's cutting rates, and that's highly, highly unusual. It's other things that are going on for that, not the expected path. So that increase in rates following kind of a hawkish cut by the Fed opened up the door for the markets to start questioning tariff policy. What does this mean? The uncertainties about the new administration and their policies that are pretty broad-based, what they want to do. That sort of thing coming into the market just creates these pockets of uncertainty. But I say, at the end of the day it's still about earnings growth, it's still about inflation. Inflation's coming in check. Earnings are expected to be here this year. So we still are constructive on the market, even following back-to-back huge gains that you mentioned in the S&P 500. We still think there's some runway.
Natalie Picha:Well, and I mean that kind of leads us to valuations. Right, a lot of people will say is this an expensive market? Are we paying too much for what we're getting?
Glenn Royal:Yeah, it is out the wazoo, as they say. I mean, it's expensive on all levels except for the bond market. I can argue that that's the inverse of stocks. Bonds are cheap. S tocks are rich. And what that does rich markets can stay rich. We know that. Cheap markets can stay cheap. So, it's not about valuation on the market. It's about where we think earnings are going to go, where we think inflation is going to go, that sort of thing.
Glenn Royal:One of the caveats to be careful of is when you have a very highly valued market. Rich market is that whenever we do have downdrafts and we do have reversions of means that we just mentioned, when we have these downdrafts, they tend to be exponential in their velocity, meaning it's like the market squared when you have these type of returns. That's built on that. So we're aware there'd be a strong sell-off should earnings come into problem or inflation starts coming back because of tariff issues. Those are all risk-oriented things. Now I want to also. But let's talk about the valuation of the market. I really have two markets here. I had the MAG-7, right, we all know those guys, right. And then talk about the valuation of the market. I really have two markets here. I have the MAG-7, right, we all know those guys, right. And then we have the rest of the market and the S&P 500, the 493 names. It's a tell of two tells. The MAG-7 valuation is extraordinarily high, you know 30, 32 times versus 16 times on forward earnings for the rest of the market, 32 times versus 16 times on forward earnings for the rest of the market. So what we look for in this year is probably a treasury market that may be range bound between four and five kind of bounces around there. We just saw it try to run to five. Bouncing off of that We'll see Inflation stays in check but you'll probably see a broadening out of participation in this market rally.
Glenn Royal:One of the things about America first policy that might use targeted strategic tariffs to do the things this government thinks are important is that I don't see if it's targeted, we won't see a big increase in inflation. If it's more broad based that's what the market's worried about. If it did 60% with tariff, 20% of China, 20% across the board, that would be problematic. The indications we're getting and hearing little things here and there in the press is that it's going to be more strategic, more targeted. So that makes me feel a little bit better about the approach, more gradual as they move. You know the Department of External Income or whatever they're talking about now. So I kind of I think that we have to be careful about, obviously about inflation and things that are going on. But I have an earnings growth there. I have a broadening of the economy. There is some slowing.
Glenn Royal:The Fed has that dual mandate. It's got to work for full employment. We're at 4.1%. They don't need to worry about that. So they're just focused on the inflation side. They're taking a chance where they're just kind of pausing.
Glenn Royal:In September I thought we were going to have five cuts. That was what was priced in the market. We had the one in December. So that was another four this year. With what we just saw that we just talked about in this last few weeks, you went to basically one cut being priced in the market in the second half of this year. So the Fed's driving the bus in here in earnings. So that's what the market's focused on today. You got a big lift because inflation looks pretty good. That means the Fed can be friendly. They started pricing in another cut as a result of that, back to two this year. So at the margin, what I really would like our clients to understand is what I just told you was all about all kinds of activity, about very, very minor things that just kind of at the margin. The markets are focused on kind of the minor details because we don't know the big picture yet. As the big picture comes out, we'll start focusing on different things more about policy, more about expected earnings growth that can come out of that policy, energy independence, the things that they're talking about, that of the Trump administration.
Glenn Royal:So yeah, I'm, you know it's, it's dicey, it's um, and there's some other things. I see, Natalie, I see we're talking some about the market structure, but in market structure, what I mean by that is I've seen a massive growth in people that are speculating in the stock market. We've always had speculation. There are bona fide speculators, things like that, but I see a lot of groups that are trying to get rich quick and are using the stock market and we're seeing huge growth and triple leverage, double leverage, ETFs that go to a single name like NVIDIA it's a name we all know, and then we're also seeing other speculative asset classes that are just going to the moon. So zero data, expiration of options that's another thing that's really blown out of here and caused the market volatility at the margin. I think that structure of the market it's kind of emblematic a little bit of past dot coms past where you've had euphoria, drivable market to a point where it's not sustainable anymore. Drivable market to a point where it's not sustainable anymore, and one of the telltales of that is all these little speculative type assets that are now being taken as you know the real deal, you know just as a solid investment as IBM, for example, and those are things at the margin. So we build up a little bit more risk profile in the market because of this excessive risk taking and a bond market that's a little bit sensitive in here to inflation, that we can see corrections in this market and it can be driven by this earnings period, the cycle we're in.
Glenn Royal:We're looking for 7% growth year over year in this first quarter earnings. It's coming in right out of the gate. Pretty good Looks like we're beating slightly again for the year. I'm going to look for 12% roughly this year and 14 or so for next year. So how we get to continue to put that type of growth up is questionable. Those are strong, strong numbers after years and years. So while I think we'll hit earnings growth this year and we could see that broadening out to domestic-oriented companies that aren't exposed to a strong dollar interest rate. Goes that dollar up, it makes me feel pretty good about where we are.
Glenn Royal:But I just want people to understand, just be prepared for more volatility this year. It doesn't mean that the S&P is going to close negative for the year, and we've talked about in this podcast that we're trying to come out monthly with these and be very timely with them. But these little market minutes. But the bond market does offer you a place of safety. If you're concerned and you don't like volatility and the uncertainty of the new administration's policies which can be very good nonetheless if you're uncertain about it, hang on bonds. You're getting paid over 5%. That's what we've seen since part of 2008.
Glenn Royal:But bond yield the real yield is almost 2 and a half percent above inflation. What I'm getting for roughly 10-year bond. Everything about that, including something called the term premium that did affect stock prices. The last several weeks started to increase and all the term premium is it's just extra compensation bond investors want for owning bonds longer. That uncertainty again. What's irony about the term premium? That's kind of in the buzz in the press right now.
Glenn Royal:It can also tell you that stocks are better attractive than bonds because bonds are pricing cheaper than stocks. So there's some all kinds of nuances that go on in that number. It's fairly complex and it's almost like trying to find the natural rate of unemployment that doesn't. You know the natural rate of unemployment that doesn't cause inflation. You know the natural funds rate, r-star, things like that. It's more of an idea that we all try to. You know quantify that. You can't quantify it really, but so anyway, that's all going on at the margin. I would just expect this year to be good. Returns, more single- digit type returns. Dividends are going to do you great. Interest is going to do you great, and just look for some chop and vol in a rich market.
Natalie Picha:Right. Well, from those comments, I have several thoughts. So, first of all, I know and we've done podcasts on this in the past right is that corrections are healthy. Market corrections can be very healthy and we looked at the historical volatility that was kind of around the first Trump administration and it gets pretty volatile, right, there was a period of time there where the market was moving just based on tweets, and so we I remember us having conversations around that so we're again.
Natalie Picha:The markets are trying to parse out what is this going to look like, you know, for the next four years, and what is that going to, not just from a policy standpoint, but also from you and I. Both have agreed that in the past, less media, less information, meant that maybe the markets didn't trade as much based on the buzzwords. Well, social media has changed that a lot. I think social media has changed that a lot. I think social media has also played into this idea of get rich quick. If we can just buy the hot dot, whatever that is, and trade it, I mean, it's just so much easier to trade on your phone than it used to be, right, you can pick up your phone, anything right For free.
Glenn Royal:I think you can get balloons and confetti. Exactly Right, I think you get balloons and confetti if you do it right.
Natalie Picha:Right, yeah, For firms like RHP that you know are very data-driven, we're very planning-based, we're looking at this for a very long term, not just what can you do for me today, right?
Glenn Royal:Yeah, and I, as it should be. You know stocks for the long run, that sort of thing. You know mining the cost of capital, how that may affect valuations. You know it's all part of what we do to help our clients and with these portfolios. But right now I would tell them, you know, fasten your seatbelt up a little bit, center it up. You're going to be OK. We feel pretty good about absent. You know something we unforeseen event there's always that but yeah, I'm, I'll feel pretty good.
Glenn Royal:You know, one of the things, too, that you may see a little bit issue this year is in the dollar. You know that we talked a little bit about that strong dollar. That happened a bit during the Trump administration. That downdraft that we saw was 20% downdraft in 2018, the second year of his administration, full year and what we saw was that the dollar strengthened up about 10%. That was raising interest rates. That interest rates go up makes a dollar and that dollar what it does is it makes goods more expensive overseas. So it affects the cells of our multinationals, which happens to be the MAG-7, these big guys. It affects the cells, the revenue that they have, not only in those foreign countries because of a strong dollar but cells done in foreign currencies that transfer back to the US and convert dollars, they hit on that currency transfer. So it typically in the past is about a 20% surge in the dollar where you really start to see the impact on sales. So we're seeing this strong dollar.
Glenn Royal:America first policies will probably strengthen that dollar, continue it to stay strong. Our interest rates that are staying here in the US versus the rest of the world keeps the dollar strong. The world keeps the dollar strong and what that's causing us to look more at and you're seeing that is to invest in domestic companies that aren't exposed to foreign currency. So if I'm getting the drive here in the economy which is your small, medium type stocks and more industrials and materials, things that are here in the US, so that's how we're looking to kind of get away from the MAG-7. You've got to have exposure to it because it is the market.
Glenn Royal:But we would argue that you probably just want equal weight exposure to the MAG-7, equal what the weighting is to the S&P 500, and then come back to America first with some of your other assets. So we're there looking at those things. Our maturities on the bond portfolio are kind of in that short of the ag duration model, which is duration target around six, we're shorter than that. I don't want that price volatility. Uncertainty of longer bonds that term premium that's coming in, I agree with that should be there. I'm just choosing to come in and clip coupons at a shorter maturity has not had that price volatility, so we're hanging out.
Natalie Picha:Well, I think that's another shift back to sort of what we said, I think, two or three episodes ago is that the 60-40 portfolio or your balanced portfolios, are back right Because you're getting paid to be in bonds, which is just such a shift from where we were three, four years ago. So it's good to have a balance.
Glenn Royal:It is, and Wall Street marketing machines are out there pounding alternatives. They're starting to say that public markets are less attractive than private markets, and I question that. I just go on a record I question that Whenever you start getting private credit deals that are being pounded a day from institutional investors, which is namely insurance companies, being forced down to retail investors because they know that's where the last great big pot of money is and why they're coming to pick you off this whole private credit. All this stuff was done in a zero rate environment over the last 15 years, their portfolios. Now they've had the same reset as the public markets, and why we're not seeing those pricing like the public markets means how opaque that whole industry is. So I just am not a big fan of it at this point. Now, if we get a big correction and a big sell-off and private credit goes to about 60, 70 cents on the dollar, we'll get very interested then. I'll be very, very interested then.
Glenn Royal:But right now, the whole private equity, private credit space is just being piled on by Wall Street and the marketing machines. You're seeing the asset allocation models that we've all known forever stocks, bonds, cash now include alternatives, trying to make this all sexy and look good and all that bullhorn. So I think, anyways, you found my pet peeve and it's that space in there. I'm very cautious of that. We can have high quality publicly traded assets and get paid and make a very good rate of return and have a highly liquid portfolio. So I'm comfortable with where we're at. Yeah.
Natalie Picha:Well, I am always excited to have this conversation and I think, well I know the feedback that we get from our clients, and even those that are not our clients about our conversations is always positive. Sometimes people agree with us wholeheartedly and sometimes they don't, and that's okay. We want, we welcome that conversation. We get really excited about, you know, the fact that people are listening and they're engaged in these, in this information, cause you know a lot of people out there are not. Anyway, we're, we're just glad to be able to have this conversation, first episode of 25. I hope for our listeners that you gain, even if it's just a little bit, from all of our back and forth and wandering across all these topics, that you gain a little nugget of information and walk away just a little bit more informed than before.
Glenn Royal:And always call us. We always welcome the calls and the emails too. Please do reach out. We're happy to answer any questions.
Natalie Picha:Yeah, so thank you, and thank you for those that are listening. I hope that you'll take a moment to subscribe to the RHP Market Talk podcast. Leave us a rating and a review. You can also find us on LinkedIn and Facebook for any additional content, which includes our Market Minutes and, as I mentioned, Glenn just did one this week, so go take a listen to that one, and it's where we can really just connect with you and give you some information.
Natalie Picha:I'm excited to announce that in February and March, I'm gonna take the opportunity to interview another one of our team members, Matthew Berti, our CFP, to talk a bit more in- depth about our planning process, why planning is so important, what it means to plan and some of the outcomes, some of the mistakes we see people make in their planning, and some of the things that we think you should really pay attention to get right in your planning, and all of that we're going to do ahead of, obviously, the April 15th tax deadline and no one likes to pay taxes, but when you pay taxes, we say you're making money, but what are all the different ways and strategies that we can help you not pay more taxes.
Natalie Picha:So that'll be coming up in our episodes in February and March, so very, very excited about that. And to our listeners, whether you are 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 you. Thank you, Glenn, and Happy New Year.
Glenn Royal:Happy New Year.
Disclosure:Royal Harbor Partners is a registered investment advisor 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. Thank you 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. Thank you.
