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
This Time It Really Is Different: How Trade Wars Are Reshaping Investment Strategies
We discuss the unprecedented market volatility following the announcement of across-the-board tariffs, examining the fundamental shift in how the US conducts global trade and what it means for investors.
• What the bond market can tell us about the economy
• Is US exceptionalism at risk?
• What Wall Street strategists are saying
• Which bonds are most attractive in this market
• The importance of diversification
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 number 46, produced by RHP Wealth Management, an independent financial services and investment advisory firm based in Houston, texas. I'm Natalie Picha, CXO , and partner, and I'm joined today by our Chief Investment Officer, Glenn. Good morning, how are you?
Glenn Royal:Well, Natalie, good morning. Good to see you.
Natalie Picha:Well, I'm glad to be here with you. I know that you have been under quite a bit of stress in the last few weeks doing a lot of research, staying up watching what's been going on. I mean, we're recording today, on April 8th, after yesterday's unprecedented volatility in the markets. We really are in uncharted waters right now, so I'm sure our listeners are excited to hear what we have to say. Just before we jumped onto this call, we were talking a little bit about, you know, some of the unconfirmed news that leaked out, and what we saw in the markets spike up with the idea that we might be getting a 90-day moratorium on the tariffs, only to find out that that was not the case. So lots to talk about today to talk about today.
Glenn Royal:Yeah, and I'll start out with I think it was. Sir John Templeton said that the four words that lose you the most money in investing is this time it's different. Right, and it's careful to think that this time it's different. But that really is. I hate to say that I'm very cautious of thinking things are different. I know that that's kind of a fallacy in investing, ultimately it's always about interest rates, inflation, that sort of thing profits, but in this case this is a fundamental change of the way the United States has done business. It's really a global trade war that was started and right now we're kind of having to wait for the response and see what's next. So we're all in the wait and see mode.
Natalie Picha:Yeah, that is definitely wait and see. We spoke briefly yesterday about some of the activity in the bond market as well and what we're seeing with interest rates, and you've always said watch the bonds, watch bond market. You know that's going to tell you something. What are you seeing right now with that?
Glenn Royal:You're spot on. I mean the bond market. To me that's the lifeblood, particularly with the Federal Reserve and the open market where they're operating at federal refunds rate and overnight reserves and doing all that. That's I mean, it really is the pulse of the economy and you want to. First thing you want to look at there's distress in financial markets is what's going on to the plumbing of the Fed with the banking, and part of what we see is everything's holding in pretty good. I want to say reassure everyone there the Fed's operating functional. I say reassure everyone there that the Fed's operating functional. Don't see much stresses in overnight funding. Concerns would be.
Glenn Royal:You know the Fed's been paring down its balance sheet that it built after 2008. It's starting to stop that. What's kind of happening in the bond market right now is the Fed has also been a buyer when they were expanding that balance sheet by allowing it to roll off. They're not reinvesting the proceeds of those maturing securities. So the Fed is an absent buyer in the marketplace. So all I have is the primary dealers and the natural buyers ourselves and quite a bit of international investors buy our treasury debt. So what we saw yesterday we're watching the auctions right now of different debt maturities to understand that that foreigner is still there buying our debt. And the other thing, with the dealers being so long debt they're not buying, they don't have the room in their balance sheets to place debt, so the markets are pricing. It's all being held right at the market, and so what we saw yesterday was a really, really sharp move higher in interest rates. I mean like a notable sharp, if you saw it on the chart.
Glenn Royal:And when you see that it's like okay, what's going on? And it could be again. I don't have the Treasury in there as a buyer of the Fed, so it probably was dealers trying to shed some scope out of their books. Also, there might have been some squeezes going on from big hedge funds that got hurt in the stock market, that were taking off hedges for their bond side and that was squeezing them on that side. So there's a lot of activity. The bottom line, besides all this trading noise, is that we saw yields and bonds go higher.
Glenn Royal:Treasuries are a benchmark reference rate, so we look at high yield bonds or investment grade corporate debt. They always trade at a higher yield above treasuries. Right Extra risk. We demand that. The last few years really since COVID, when so much money was out there chasing yield we saw these spreads trade down to historically low levels. You were seeing corporate debt, you know, 60 to 80 basis points above comparable maturity treasuries. Normally that's been about 130 basis 1.3% above treasuries. We saw yesterday a big move where that yield got back up to about 109 basis points from 80 recently. So you saw that widened out. You saw that's investment grade. I saw high yields go back up to almost its normal long run average near 4.5% Big move from 2.8. It's a big move higher and those are all signs that stress is now hitting beyond the equity market into the debt of the companies.
Glenn Royal:As investors, we want more yield because we're concerned about their building the base back. I want to point out that all we've done is return to almost to the historical averages. We haven't gone beyond that, so there's not stress in the system like we would see in 08. This is more just repricing unknown risk of inflation in a slowing economy that could happen as a result of tariffs. You know the bond market is kind of telling you we've got two-sided risk here. Two-tailed risk is either we're going to go in a global trade war that leads to recession, and that's why yields are kind of coming up a bit, a little bit, or we're going to go into negotiations and it removes the biases in trade, makes it a more level playing field and the markets recover. I don't know which is going to be which. No one really knows at this point.
Natalie Picha:Yeah, and I think you had mentioned munis are under pressure a little bit too right now.
Glenn Royal:Yeah, that's something, Natalie munis. One of the things that make munis so great is their tax-free interest. We're allowed to invest in water and sewer and different needs of municipalities and in return, as investors, to incentivize us to invest in those projects, we get to write out that interest as tax-free income. That is under attack. There's been rumors for this to be attacked for decades. I got the biggest lobbyists in the world to protect municipalities from that, but what we're seeing out of the White House today who you got to give the Trump administration credit that they're willing to do the hard things to try to get the deficit under control. You know, try to get these things under control, bring back manufacturing, which they think is hollowed out, the core of the United States, and bring that home. I get that First time in 100 years we've done anything like this the highest effective tariff rate. What does that mean? It's uncertain. The economists will tell you that it means recession and inflation, because the expectation that foreigners such as China will assume all of this expense on this tariff is, I think, misplaced. And what we'll be looking for, what's going to really be driving markets, is going to be economic data. So what are we looking at? At growth, every data release on growth and every data point on inflation. We've moved to really data-centered focus.
Glenn Royal:As we try to analyze the outcome of this, these moves, and again, nobody knows if Wednesday's the deadline, it's Tuesday. You may get a deal struck between now and then and this market just goes up right on your face. But what we're seeing today is a lot of hope, a lot of rebound activity in the market. Markets get oversold, they rebound, that's just the nature of it. But I want to introduce a term to everybody if you hadn't heard of it before. It's called the dead cat bounce and I was kind of, you know, thoughtful, you know, think about that. But it's really a pretty good visual, because what happens in bear markets is that we're sucked into thinking these are bottoms and tradable bottoms yeah, particularly with a lot of the trading. That's activity, robinhood apps and all that and I'm afraid people are being sucked into what we could refer as dead cat bounces, where pros are lightening up into risk. Individuals have been buying through this whole sell-off. So there is the belief that there's going to be temporary pain, and this is going to be temporary, just short-term pain, and then we're going to be better off as a result of this and I understand that I get where that's coming from.
Glenn Royal:My question as an investor is that how long does this take? I don't believe it's going to be two months. I think it's going to take years to be able to rebuild manufacturing in the United States like we're trying to do. And by going with whole scale tariffs across the board, you do throw us at the risk of a recession and perhaps global recession. So this could be a very dicey time and as investors, I really kind of want you know I'm good with my bonds.
Glenn Royal:I know yields went up a little bit, but I'm being paid well with fixed income. I'm being paid well with cash. I am uncertain on stocks, so I just kind of want to go sit and sell it Now. What I can do in the stocks is I can do dividend paying instruments. I can diversify my portfolio where I take the chances of risk of having too much concentrated in tech. Don't want to do that. I just want everything leveled out, and we know that small caps have been touted for the last six months and they've just shown horrible, horrible performance. I don't see that that's going to get any better, so I'd probably avoid the small caps too.
Natalie Picha:Well, and all those points, great points. I just want to make a note that we are looking at data, lots of underlying data, and when you see a lot of the retail investors coming in and buying the dips, they're not necessarily as educated on all of the math that's underlying, and so earnings really matter here. The market's still rich.
Glenn Royal:Thank you for bringing that up.
Natalie Picha:That's where we are. So yeah, expound on that markets are rich earnings matter.
Glenn Royal:Right now, we're forecasting 9% profit growth in the S&P at the consensus level. Right, I've already had Goldman Sachs. You know they're pricing a recession. JP Morgan. They've taken that down to 2% growth. So Goldman Sachs, on their estimate, is one of the things we've.
Glenn Royal:Also because this market when we started let's go back to last year on the exuberance you know we popped up. We went to extreme valuations. We were like 28 times forward earnings on the market on PE multiple. That has corrected down to like 20 times with this market correction. But if we are to enter a recession, if we are going that route, earnings will decline. They will mark these earnings down and so as earnings go down, stocks go with that. So I'm concerned that if we do lead to a full-blown trade war, we will see a hit in these earnings. That's going to lead potentially to layoffs and a bad cycle of a recession. And that's what I'm probably most fearful of right now is that this actually does blow out to a full recession.
Glenn Royal:In order to accommodate the changes that are necessary to make this a manufacturing nation again. We're a service producing nation, right, we talked about this a little earlier. The majority of what we export these days, since 2000 in China and the World Trade Organization. I can show you industrial production just went flat. We don't make anything anymore, but our GDP and our income as consumers went up the chart. So that coined the term US exceptionalism. That's at risk right now with this going on as US exceptionalists.
Glenn Royal:Because now what's happening is I'm starting to get debt in European markets go up because they're going to spend deficit spend in order for defense spending, all the things that they need to do, rightly so. A lot of these things that I think President Trump was brought to the attention were correct to address China, europe's, nato's budget, all these things. It's just the manner that it came down. Most of those are going to be more targeted. That's why the market's freaking out. So you know it's an all or none trade.
Glenn Royal:But anyways, one of the concerns I really truly have on retaliatory tariffs is if they go. If Europe does a digital tax so because we do services, we don't sell them tractors so much If they tax Microsoft, amazon, those max seven companies that we all know about, then that's going to affect the corporate profitability. Well, max seven's 36% of the S&P 500 still a big component, so it's like an inverted pyramid. In the top of it. It's kind of top heavy, right. If I get the max seven, it pulls down the S&P, which is what we saw. Most of the S&Ps declined as MAG-7 oriented equal weights outperformed the S&P year to date cap weighted. Then that affects 401k plans, right? So if you really are a foreigner and you want to retaliate against the US, you go after our 401k plans because over 60, you know 65% of us are invested in the market.
Glenn Royal:I know there's some banner that only top 10% of the market. That's nonsense. Everyone's in this market. Main Street is connected to Wall Street because of Wall Street, like we saw in 2008, has issues. Main Street has issues. Our economy's plugged in with stock market. So it's crucial that the administration understands this. I think they do.
Glenn Royal:There was the rumor that came out Monday. We thought it might've been the so-called Trump put, which is the point where the market declines. If Trump's willing to say something to get stocks up, there's a Fed put the point. The market declines so much that the Fed's willing to do something. The Fed is stepping back because they don't have clarity on inflation either. They don't know if the tariffs are going to go through or not. Nobody knows. So that's where the Fed is kind of stand back, but they're prepared. So there is some expectation that the Fed could come the Calvary to the rescue and start lowering rates. But last fall, when they lowered rates, interest rates went up 1% because I still have a deficit. But last fall, when they lowered rates, interest rates went up 1% because I still have a deficit.
Glenn Royal:All the other countries in the world, including China, have a flush bank account. We do not. We can no longer write checks to spend our way out of this. We're in a box. We're in a tight jam. This isn't going to work out like I think the administration thinks. So this is really a time to understand your risk profile. Work with your financial planner. Am I have the right asset mix stocks, bonds and cash? Am I willing? Can I go through a year or two of negative to flat equity returns with my bond market paying me 4%? Can I get those kinds of returns? So I think it's a good time to have conversations. Be comfortable with your asset allocation.
Glenn Royal:Diversification matters in these markets, not concentration to the S&P 500, which has been the case, because it was the only place to make money right the US exceptionalism. But now it's no longer there. So you have to abroad more international investing and I can see us becoming more like an international, like a European investor. I can see me going and this goes down. So now the US is no longer like the safest place for me to go to park my cash. I have yield competition from Europe. I can go get returns there.
Glenn Royal:If I'm a Japanese life insurance company, I can go elsewhere. So there's a lot of setup here. That's kind of has us nervous about, you know, the supportive market structures if these things change. But, like I say, it's a good time. What we're trying to do is, you know, make sure we have broad diversification, probably leaning up the capital structure towards those larger companies. Our maturities, because I do like fixed income and it sounds a little like I'm talking about two sides of my mouth, but I don't want to own long maturities. The longer the maturities you are, the more subject you are to duration risk.
Natalie Picha:Yeah.
Glenn Royal:If deficits don't come into control then you're going to see it priced out in that long end with yields go higher. So we're trying to stay that three to seven year, shorter maturities, less volatility to interest rate moves and clipping some pretty good coupons in here and being paid well.
Natalie Picha:So this is a question that's being floated around quite a bit. If we were to back off some of these policies, if we get some deals made, could there be a recovery? Or has there been so much damage done just in this first quarter of the year that we're not just going to bounce right back?
Glenn Royal:I think you'll get a recovery. You're going to get a reflexive bounce just the nature of how markets work. You saw that bit today. So I think on the news you'll get a reflective bounce, but I don't think it'll be back to prior levels. You know S&P forecasts have been cut 15, 16% across the board in the last week by street strategists, the board on the last week by street strategist. From these levels, from where we are now, could I see, you know, 7%, 8%, 9%, 10% gain? Yeah, possibly if things were to. You know, tariffs were negotiated and all that. But from where we were at the beginning of the year, it's probably now just a flat year.
Glenn Royal:I don't expect much return out of stocks from Jan 1 calendar year because now it's all in our mind. I don't really trust the federal US government anymore at the moment. I can tell you that. But I'm very suspicious of anything they say. So you know I'm not moving on whatever they're doing. So it just puts me in a different position as an investor. But I do, I think, and that puts more of a discount on the US right, we discount things when we have uncertainty.
Glenn Royal:So I think that that probably pulls that multiple down, that PE multiple. You know the PE is the price earnings multiple. It's what we're willing to pay per dollar's worth of earnings. Historically the markets run 18 times earnings. We can run up to north of 30 during dot-coms, which is super rich and in the mid-20s when things are really running well. But when things blow up, these multiples get into mid and single digits. So that's what I'm looking at is what the driver will be for.
Glenn Royal:Further downside is full-blown tariff war and impact on earnings. And if earnings decline 13%, this market has the potential to go well. You know, I don't even want to say it, but it's almost like three. If I put up the floor forward, pe multiples I've seen are like 14 times earnings. If I get a contraction in earnings to only 2% growth this year, that puts us around 211 in earnings on 14. That's 3,000 in the S&P. I mean we're way above that now. You know 5,000.
Glenn Royal:So there's a lot of downside in here at risk because of this and that when you do your risk reward, the risk is greater than the reward at this point. So focus on dividends, focus on cash paying investments, focus on that shorter part of that yield curve. It's not subject to as much volatility. You're getting paid there. Thankfully, with this reset in rates, you're getting paid there and then we just need to go through. If tariffs go down, we got to go through the adjustment process of rebuilding manufacturing at higher cost, training labor to go in and do that. Now will investment opportunities appear Absolutely, robotics, all these different things you can see to facilitate that. So there's always a place to make money. But this is like a market that's going to be more narrow spots to make money rather than broad-based if this goes down.
Natalie Picha:In this moment? Yeah, as we close out just a little bit, can we talk about the dollar strength, because there's been some conversations around strengthening dollar, weakening dollar and how that's playing into this whole drama.
Glenn Royal:Right off the bat. We're not at risk of losing the world's leading reserve currency. There's no one to replace us at the moment, so the dollar is still there moment. So the dollar is still there. But I've heard a lot of arguments over the last decade about, you know, the dollar being too strong and you know a cheaper dollar makes our exports cheaper abroad. It makes foreign companies more profitable because the dollar is kind of a drag on them. So foreign investments actually do better in a weaker dollar environment. But I think the question is the currency is a world's reserve currency and what could change that is comparable yields from other countries where I'm not having flows of capital to the US.
Glenn Royal:Concerns about rule of law, which has always been one of the attractiveness of the US, is that you're never going to get your money back. Your patent, your intellectual property rights were protected and all that. Why do that's a question right now if you're a foreign investor. So I think there is going to probably be a decline in the value of the dollar, but I don't see it at risk as losing its status as a world reserve currency. But there will be moves and I know you can correlate crypto with this stuff and I think a lot of people are, but I have a very hard time. If Donald Trump wants to control all assets, he's definitely not going to allow the dollar to be controlled by whims of the markets. The US government's going to control the dollar to be controlled by whims of the markets. The US government's going to control the dollar. So crypto trade is fascinating on its own right. What's interesting about crypto as a risk asset is it's declining, right. Gold's up. So crypto more is a NASDAQ proxy than it is a risk-off proxy. It correlates much more with NASDAQ thing.
Glenn Royal:In fact, you know Magnificent Seven, all that, yeah right, kind of watching that, but anyways, yeah, I think the dollar is showing signs of weakness. We haven't had it on time. It can help us out a little bit, but it's certainly to watch. If it gets too weak, then that impacts our debt because we have more expense, less dollars to pay. We have to pay more dollars out because it's worth less. It's inflationary to us as US consumers. There's just nothing good about it. So hopefully that doesn't come to pass, but we are starting. There's always going to be conversations about the dollar, the weaponization of it. This morning, china was weakening their currency in order to protect themselves against the dollar, and so I think all of us are probably going to become much more experts in foreign currency in our careers the rest of our careers, if you're professionals because we're going to have to think about it. In world, we moved from the US to a global marketplace now as a result of this, and I need to know how currency is going to impact me as a foreign investor.
Natalie Picha:Right, it's something on their minds now.
Glenn Royal:Oh yeah, yeah. This is a whole, this is a paradigm shift. I mean, this is a complete different way of how we've operated in any of our lifetime. And it's betting the farm. That's another thing. I think that's Wall Street's so nervous. You're hearing all these billionaires and all that starting to question it. This is an all or nothing trade, with the reciprocal tariffs barriers across the wall. It's a big Chinese wall around the United States and I understand the argument that if you're China, you're supposed to. You know the US is the world's largest consumer. That's what they say. China's in the greater risk than we are, but China spent the last 10 years since Trump 1.0 reducing its reliance on the United States. It's in a position where its economy is in the toilet because of property issues and they're doing everything they can to stimulate their economy, and they got to do it. So I'm not putting a lot of weight on that argument. I just I know there's a lot of bright people that think that way, but there's a lot of bright people that think the other way.
Natalie Picha:So that has been very true this time. I mean, we're all reading and seeing so much information and and there there are bright people on both sides of the fence that have some very valid arguments, and there's a lot of math underlying some of those things. So data is key right now. I think there's a lot of data.
Glenn Royal:There's a lot of data. You just can't build a $4 billion auto plan overnight. And you think they're going to build it in a union state, if they build one. No, they're going to build it in non-union states like Alabama.
Natalie Picha:Yeah.
Glenn Royal:Come on, you can't do it right. Even in these changes, people are going to do the most beneficial, cost-wise or whatever that may be. Exactly, exactly. I wish I had like all this excitement to say, and things are great, and all this worry. But yeah, I was looking at 1987. I've been a trader through the crash of 87, 91, 98, 2001, 2008, covid. Here we are again, this one's different or the most dangerous words in investing, right, but this one is different because we're changing the way we do business with the world. Yes, well, see how it works. The data tells us it's working. We're going to lean into it and, hallelujah, good for everybody. Good for everybody. Otherwise, we're going to be cautious.
Natalie Picha:Well, I am always so grateful and I know that our listeners are too to let us kind of get a behind the scenes look and jump into your mind, where I know you just spend a lot of your time thinking about and studying these things, and we're so grateful for that. It's good for our clients and it's good for those that listen to us. So I just appreciate your candidness today. Weren't really sure exactly how this conversation might go, and we want everyone to know that if you are a client, if you're a listener, we navigate storms. That's our job. Our job is to navigate and give you as much data and information as we possibly can. So thank you, glenn, for joining me today and sharing your expertise, glad to be here.
Glenn Royal:Any questions, I encourage you to reach out. We are on the phone quite a bit, as you can imagine, but we welcome all conversations.
Natalie Picha:Yes, we do so. Please take a moment and subscribe to RHP Market Talk. Leave us a rating and review. You can also find us on LinkedIn and Facebook. For additional content, always reference our website at www. royalharborpartnerscom. We also give a lot of resources there as well. 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 and 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 Thank you 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.
