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
How to Position Your Portfolio During Uncertain Times (Hint: Cash Flow is King)
Markets aren't designed to move in a straight line, as evidenced by the recent 3% decline in the S&P 500 and 4% drop in the NASDAQ composite. And while some movement is expected, huge swings may make investors nervous.
In Episode 45, Natalie Picha, Partner and CXO, and Glenn Royal, CFP® Partner and CIO, discuss recent market turbulence and how to approach the market for the remainder of 2025.
Key Highlights:
• Trump's tariff plans aim to transition the US economy to a smaller government with increased domestic manufacturing
• The costs and timeline of this transition remain uncertain, with tariffs potentially creating stagflation conditions
• Learn how a focus on cash flow-generating investments like dividends and fixed income may help mitigate market volatility
• Key upcoming events: a possible government shutdown, new tariffs, FOMC meeting, and major options expirations
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 45, produced by RHP Wealth Management and Independent Financial Services and Investment Advisory Firm based in Houston, texas. I'm Natalie Pica, partner in CXO, joined today by our partner and CIO, glenn Royal. Welcome, glenn.
Glenn Royal, CFP®:Hi Natalie, how are you? Glad to be here. Good to see you.
Natalie Picha:Good to see you too.
Glenn Royal, CFP®:Actually, can you see me? I was hiding underneath my desk before you called.
Natalie Picha:I know I know we're recording today, March 11th, after yesterday's nearly 3% decline in the S&P and a 4% decline in the NASDAQ composite. We got a lot, a lot, a lot to talk about today. I know everyone's going to be really interested to hear, certainly, what you have to say and what RHP is thinking right now, after Monday, M yesterday, arch 10th. So we're just going to jump right into this. We got Trump tariffs on the table.
Natalie Picha:So we're just going, we jump right in with what we saw yesterday, right, the biggest decline, and most of that decline being in the technology shares yeah, a little reminiscent of the dot-com era.
Glenn Royal, CFP®:Uh, because what we saw did see the decline mainly in those mag seven and the more volatile speculative stocks that are retail favorites, that trade quite a bit. That group really got clocked. But you saw, you know, quite a few of the stocks actually kind of more the equal weight outperform, uh it was, was in broad base. It was largely to those kind of hot dot uh high flyer stocks that we've had the last few years.
Natalie Picha:And that's kind of understandable, you know, whenever we sit down with clients and we talk about. Markets are not linear. Markets are not really designed to just go straight up and go up every single day, over and over and over again. And of course, there's a lot going on with the Trump tariffs and his story around how he's re-engineering the economy and I think that's coming into play here. But the markets aren't meant to just go up every single day.
Glenn Royal, CFP®:Yeah, and I think too, coming into this year there was probably a little more optimism about how markets would perform a little more pro-market policies out of the administration, like the first term of President Trump, so I think those expectations were pretty high.
Glenn Royal, CFP®:However, as we've learned, president Trump and his administration has a focus on trade, and how they're approaching trade is, I think, best stated that they understand there's a cost to go from where we are this point A in this economy where the United States currently is to where we want to go, point B, right Point B is smaller government, increased manufacturing in the United States and less imports.
Glenn Royal, CFP®:That's an admirable goal where they're trying to go, but we just don't know how long it's going to take to get there. We know you can't build $4 billion automotive plants overnight, so things like the reality of it. We don't know how long it's going to take to get there and we don't know the cost. So things like tariffs does that possibly increase the cost for US consumers, the manufacturers, or does the exporting country pay for that cost? We'll see, and there's some things we're going to track to see where those costs try to come. In the system you can look at consumer prices and then producer prices, and if they start to kind of track up a little bit, then you know that we're eating it more than the producers in foreign countries.
Glenn Royal, CFP®:So, we'll be watching for that. We just don't know yet.
Natalie Picha:Right. Typically I mean the consumer pays one way or the other. It's flowing down to the consumer.
Glenn Royal, CFP®:It is the sentiments for not just with the consumer, it's also investors and businesses as well. Right now, because of the rapidity of change on tariffs on again, off again, little confusion around it it's got the market. Just you know you go risk off when you have this kind of uncertainty which, by the way, I want to nominate uncertainty as the word of the year for 2025, because we have it out the wazoo, my other favorite word Lots of uncertainty, yeah, that's what the markets are pricing in and we really probably thought that again starting out. If you think about the carrot and the stick analogy to get things done, I think we weren't expecting such a hard stick so quickly. We thought tariffs would be a little bit more targeted, strategic. But this reset is causing concern that could affect corporate profitability, margin compression on the cost, as well as inflation. And, if you think about it, if you increase the cost of goods through tariffs and that generally reduces the consumption of those goods, the demand for it, that's stagflation. It's not something that we normally see faced with the markets, but as we go through this period of a stagnating economy as it processes tariffs and the potential end costs, that's the definition of stagflation.
Glenn Royal, CFP®:So what's weird is two weeks ago I was at a breakfast meeting with a BlackRock strategist on top of the firm and I mentioned to her. I said I just for the first time in my life I'm thinking of buying treasury inflected tips, treasury inflation, protected securities in the bond market and pairing that with a 10-year treasury yield. Well, think about it. I mean 10 years. Treasuries generally rides on inflation, so yields would come down, price would go up. If I thought inflation was coming down. It's not because of that. I think inflation will be here. It's just a slowing of the economy and it puts now the Fed more in the driver's seat of Fed cuts.
Natalie Picha:I was just saying. I think we've heard already now I'm reading in the news that is there going to be a Fed cut? Is there going to be a Fed rate cut as early as June?
Glenn Royal, CFP®:Yeah, I mean it's starting to price in. You're seeing a little bit of a better than 50% chance that you'll have a cut in June. Per Chicago Merck data and odds are increasing. You know two or three cuts this year and we can step back a little bit too. And if we go back to December, we actually had a Fed that was pausing rate cuts. So the market had to shift from a Fed that was friendly towards us to pausing because of uncertainty. And now that that's all upon us and we're in the midst of that, I think it does give the ability for the Fed now to come back in and answer it some. I think we need greater clarity on tariffs, how long they're going to last. You know what the retaliatory tariffs are, that sort of thing, but we need some clarity for this stuff to clear, and until we get that, you know, markets are just probably going to mark time in here.
Natalie Picha:You brought up something earlier that I thought was really interesting too, that's going to have a long-term impact, could potentially have a long-term impact, and that's the TCGA, the Tax Cuts and Jobs Act that has an expiration coming up at the end of the year. Can you tell us a little bit more about that and how that cuts into corporate?
Glenn Royal, CFP®:profitability. So I'm just learning more about this and it's fairly deep. I'm not a forensic accountant. I really have to understand this stuff. But it has to do with at the end of this year.
Glenn Royal, CFP®:Part of the reason why we're going through Doge, cutting expenses, the different things that are happening right now is because our deficits are too high. Also are the tax cuts. If we need to extend those at the end of the year, you have to score them out where it's deficit neutral, right, and so that's why we're going through all these cuts. To be able to do that. Then you'll actually see an increase in corporate taxes paid. That might have been higher had we never had the Tax Cut Jobs Act in the first place.
Glenn Royal, CFP®:Hard to say. What does that mean? It's because one is the economy has gotten bigger. You have a bigger pool of revenue, so revenues have gone up, just naturally. But you've also had that repatriation. That part of that Tax Cut Jobs Act was to bring dollars back to tax them here rather than keeping them ashore abroad for so long. So all that's largely happened.
Glenn Royal, CFP®:Right now You've had all those benefits and part of there was two little flyers in the tax code that were tax equalizers international and I'm sorry I don't have the details, I'm learning it quickly but these little offset tax equalizers have the ability to increase the taxes this year just because of the expiration of that act. So it's put the administration and the reason why it's important is that affects corporate profitability margins all that right. That could be problematic for stocks, very much so at the end of the year. So I think the first half this year is going to be about tariffs and then the second half of the year, or particularly as we go through, is how are we going to be able to extend these tax cuts? They could probably do just some simple extension or something like that to buy a little bit of time. So there's going to be a lot of horse trading going on, but I think it's imperative that they figure out a way to make these permanent for this market value in here.
Natalie Picha:What's interesting about that, too, is so we're talking about short-term pain for long-term gain. That's what we're hearing, that we're in the adjustment period. And I know you've been doing quite a bit of research and reading and have been talking about this particular chart that shows going from point A, which is the US economy today, to point B, that smaller government sector, and just how big are the costs going to be during that adjustment. And so, even when we're talking about the TCJA, how long and how deep is the adjustment?
Natalie Picha:I'm seeing a lot of different numbers out there from you know, analysts that we still end the year in a positive territory, but we don't know how long some of these adjustments are going to take. Just what are your thoughts and what are you reading right now?
Glenn Royal, CFP®:So these are macro, big picture things that we're going to be dealing with that are really top level. Down at the bottom level, where the rubber meets the road, is corporate profitability, earnings. So we have seen analysts downgrade earnings expectations because of what's going on the uncertainty for this first quarter, but they picked back up in the latter half of this year. So the market expectation right now is that earnings growth will pick up in the second half of the year. We won't have what we call price earnings multiple expansion. Generally, stock prices are a component of future returns or a component of earnings growth. If I get 8% earnings growth, I can expect stock prices to be in line with that 8% growth. But if I have a market that's willing to pay more for those earnings, that multiple goes up. P multiple that's another way prices lift. We're seeing that P multiple come down to more reasonable levels, still relatively rich, about one standard deviation above the norm. But against that, I think the market is going to probably be focusing a lot on stories and ideas and things and all that and not so much on the bottom line. We will. I mean that's important. I don't want to just say that it is important, but this is a year where there's a lot of stories going on and that catches your attention and I think, depending on how loud the stories are, it could override that earnings story. But we've got to watch that. That right now is the expectation. Earnings growth was about 11% for the year. It's down about 9% Corporate profit growth in 25. That's what we see, kind of returns for the year and from these levels that's up 11% or so from here after the sell-off. So in this market, let me just tell you what I think investors should do really and part of it is what we did last year is when you have valuations so high like they are 97, 98th percentile we've corrected, by the way, with this market decline, but we're still like 78th percentile, we're still way up there. So we haven't corrected that much. That's largely a testament to how strong the underlying economy is and that sort of thing.
Glenn Royal, CFP®:But I think that the importance of cash not cash as an investment, but cash generating investments, dividends, fixed income, investments that pay you cash flow when you have these kinds of markets that are uncertain, you focus on cash. How much cash flow can my portfolio produce? So you know like we have had a lot of movement towards these other areas of the market in the last three, four months, trying to position away from an overvalued mag seven market, and I think that that's still a good place to be. You can kind of hang out there. The other area that and this has kind of surprised people but the real winner this year, and there's press all over the Wall Street about the US losing its exceptionalism. I'm not sure about that, but we are, as far as stock market performance this year, all the foreign markets are double-digit returns, a lot of the Asian markets. It's just the US that's suffering, largely because of the trade story. So you know, I think you would say just focus on cash flows, focus on just not trying to chase the hot dot, don't be a trader.
Natalie Picha:Yeah, I mean that's so well said. I mean that goes back to I mean, if you listened to the last podcast, we had one of our other team members, Matthew Berti, on with us who does a lot of financial planning. The financial planning it comes back to that. It's the diversification, it's having that balanced portfolio. It's not chasing the news, like you said, chasing the hot dot, and this isn't. You know, we're in this for the long term, it's not about the short term.
Glenn Royal, CFP®:so yeah, and then we had a case 2008. You know, interest rates kept low, all these different things, uh, and that that really led to the outperformance of the max seven. It was was a very narrow, concentrated market. Those were rightly so. They were making all the money in the world. But now the rates have reset. You know you have inflation in here. You got different things. The Fed has, you know, done a lot of movement to reset the economy. We start operating more on a normal basis and in that normal basis more on a normal basis, and that normal basis you want to asset allocate. You want to diversify your investments. You want growth, you want value, you want international, you want large domestic. You know that's important in here. I think it's super important. So diversification is what's helping your portfolios in here. The ones that are all super concentrated are getting hurt the worst. Right, right.
Glenn Royal, CFP®:Let's talk about some dates too. There's some short-term stuff coming up on the calendar. That could you know. I joked around last time. Keep your tennis shoes on, because we're going to be running around these markets here. So government shutdown possibility on March 14th, a couple of days from now. We'll see. You know that's one of those exponential things. The original shutdown this isn't defaulting on debt. This is causing hassles for people's daily lives, but they shut down. It's not so bad at first, but over time it does start to become a market concern the longer it lasts.
Glenn Royal, CFP®:You've got the tariffs coming in tonight on steel and aluminum. Because of some issues with Ontario, Premier President Trump's increased those tariffs to 50% on steel and aluminum, effective at midnight. And then I have the FOMC, the FAD, meeting next week for their regular meeting. And then, not to put the cherry on the top of all this, we have major options expirations. On the third Friday of March, the quarterly expiration stock featured the triple wedge, quadruple wedge. It's a major market trading day, Not one. As investors you probably want to watch it because it's more kind of mechanical type trading. So a lot of that's going on. So I have a lot of market moving, potential volatility through next week, and then it continues.
Natalie Picha:Welcome to the first quarter of 2025.
Glenn Royal, CFP®:Yeah, I had to get two pairs of tennis shoes. I'm telling you, already worn the first pair out.
Natalie Picha:I'm telling you Already worn the first pair out.
Glenn Royal, CFP®:Yeah, I know, I know, but I look at just just balanced portfolios. We pounded the table on bonds last year. I'm so glad that people listen to that. That has proven to be a very, very good part of the portfolio in here. That's helped out. We'll get through this.
Glenn Royal, CFP®:This is more kind of evaluation, with concerns around reshaping a federal government and tariffs and that sort of thing that we've never dealt with before. I have to admit that's kind of new and will it be like. You know, the truth's always somewhere in the middle, right? I don't know how it's going to go. It's somewhere in the middle. You know court cases, different things like that that they're trying to do. The Doge we can talk a little bit about.
Glenn Royal, CFP®:Doge, by the way, you know, certainly has caused a lot of angst and anxiety around the country. But when you start to put the numbers, there's about 2 million federal employees. If I throw in postal workers, I think that goes up to about 3 million and that's less than 2% of the total labor force. It doesn't move the needle. It's not enough to be able to get our debt to deficit down to 3%, as Treasury Secretary Besant wants. So the next on the radar probably is what's going to happen to these entitlement programs from defense and this is the other thing. If defense is the largest spender right in the budget, then you have Medicaid, medicare, social Security, those entitlement programs that the reality is. If you want to get this down, you're going to have to look at those and that I do not know. That's that point A to B at what cost and how long. I don't know how that's going to be, but that is likely the next step where you'll start hearing more about that. Those are important because those are fiscal injections, that's capital that comes in by the government spending and from defense spending, all these other checks that go out. You start shrinking. Federal government got the biggest purse and moves the needles and you shrink their spending. Then you have to really depend on the states and the local governments to kind of pick that up, yeah, yeah. So there's a lot of that at play.
Glenn Royal, CFP®:So this, this, is a year where I think you just, uh, you get that cash as much as it generates. You have a diversified portfolio. I think you might want to look more international, away from what the US is doing this year. Fixed income I probably still want to stay shorter maturities, because the uncertainty around inflation and what it may do out there longer. So stay in that three to seven year type area Spread product. You're getting paid very well to be there and just kind of sometimes, natalie, I feel like a whitewater raft guy. I just got to keep you in the boat, don't let you fly out around the bend, but I'm letting you know we've got some turbulence in the water. Might be more to come. We're going to get through it. We always have. We will.
Natalie Picha:It's always navigating whatever's around the corner, and you never quite know what might be around the corner.
Glenn Royal, CFP®:You don't. And market conditions change, and when that leadership changes, you want to be on top of it, and that might be happening a little bit right now.
Natalie Picha:Yeah Well, thank you so much. We always feel like we have some really interesting conversations, and today is no different, so thank you.
Glenn Royal, CFP®:I'm glad you found me getting out underneath my desk.
Natalie Picha:I was going to stay down there for a while, through up markets, down markets and all over the place. Down markets are not fun. Adjustments and pullbacks are not fun, but they are part of life. They're part of it, so appreciate your insight.
Glenn Royal, CFP®:Yeah, for cheap markets. I need cheap markets. That's what gets me excited, so you know.
Natalie Picha:Yeah, corrections create opportunity.
Glenn Royal, CFP®:It does.
Natalie Picha:So thank you for being here today sharing your expertise. Thank you 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 Minutes, where Glenn shares his quick market and economic insights each month. If you do have any questions or you want to discuss today's topics, please get in touch with us through our website at royalharborpartnerscom. 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 you.
Natalie Picha: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, investments 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.
