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
Wall Street vs Main Street: Why Professionals Are Bearish While Retail Keeps Buying
In Episode 49 of RHP Market Talk, CXO Natalie Picha and CIO Glenn Royal, CFP®, discuss what keeps driving this surprising market, where valuations are approaching dot-com levels while bond spreads have collapsed to historic lows. Other topics include:
• The disconnect between retail and institutional investors, and who has been right
• Have we seen the true impact of Trump’s tariffs?
• The impact of cryptocurrencies becoming legitimate institutional investments
• The long-term consequences of the politicization of the Fed
If you enjoy our podcast, please subscribe, leave us a rating and review, and share with your friends and family. You can find us on LinkedIn and Facebook for additional content, or reach out through our website at royalharborpartners.com. We're here to guide you on your financial journey, whether you're just beginning or already on your way to achieving your life goals.
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, produced by Royal Harbor Partners Wealth Management, an independent financial services and investment firm based in Houston, T exas. I'm Natalie Picha, one of the founding partners in CXO, and I'm joined today by founding partner and CIO Glenn Royal.
Natalie Picha:Hi, Glenn how are you?
Glenn Royal:Hi, N atalie, I'm doing well. Good to see you.
Natalie Picha:So good to be back here on RHP Market Talk. We usually take a break from recording during July because there's a lot of people coming and going and we know lots of people are taking vacations and so it's great to catch up A lot to talk about. Of course, there's been a lot of market activity, certainly a lot of media going on out there. We're recording this on Thursday August 14th and we saw on Tuesday August 12th another record high for the S&P 500. And I have to kick this conversation off with just saying wow, and do you think this market is a little overbought?
Glenn Royal:Yeah, wow, that's like wow, wow's good, yeah. Just, I mean it is in the sense that you've had pretty much a moonshot lift off that liberation day lows when we had a little bit of a walking back a few days after that, bam off it went, yep. And so that's led to where various metrics we look at from price earnings, multiple to shareholder yield, all these different things are all showing that the equity markets are at the higher level, the valuation range they've experienced in postmodern World War II history. We're scratching right through at the dot-com level in terms of valuations on stocks. It's a pricey market and on the other side of that, in the bond market, which probably offers better relative value at this point.
Glenn Royal:But, however, I do want to point out that we're seeing richness in the bond market, and that's in corporate bonds, it's in asset-backed securities, anything that's showing that typically pays a spread over the risk-free treasuries. That spread has collapsed to a level I've never seen in my career. Things are tight. Could be different reasons private equity, private credit, sucking, some of that stuff that might have come into the place and leaves better issues out there A little uncertain. But you're right, we are seeing valuation levels that are pointing to richly priced markets pretty much across the board. International value small companies. Still you had that breakdown. You got a market. Still that's AI focused, very narrow leadership, the big guys, and for good reasons. We can chat about that. But that concentration of markets, what's really blowing this metrics to where they're very rich?
Natalie Picha:Well, and it's interesting, I think, that everyone continues to anticipate more inflationary pressure as a result of the tariffs and where we are with the trade war. We got some better than expected information earlier this week and then we start to see, this morning, even the CPI numbers coming out. Now we're seeing that inflationary pressure which we fully expect. The market's paused. I think you mentioned just this a little bit ago, that the market's fairly flat today. But where do we go from here? Yes, it appears that the only direction is up.
Glenn Royal:It does and I think that's probably a great credit goes to retail that's been bidding this market up. They've been right. You go back to when all this started. All the pros you know they looked at the math, do what they do and it was negative and very negative and so they responded so. But retail Vanguard the 401k automatic bid every two weeks and these type of products continue and retail has been rewarded richly for buying a dip, really the last 15 years, and so they're trained in that mindset.
Glenn Royal:When you get a sell-off, you buy the dip. What will it take for that dip to be worse than just a minor dip and a correction? It's probably going to take just a recession, things like that, things that just aren't in the cards at the moment. So that's retail was correct to buy that dip and run it. The tariff really hasn't shaken out like we thought. There was that concern. It would blow back immediately in the cost. But we need to kind of think of the timeline. These tariffs have had fits and starts on again, off again, 90 day extensions, more return they just kicked in last week at 15% level.
Glenn Royal:So they're brand new now they're here and it's a year ago. We were looking at a effective tariff rate of under 3% a day. It's around 17%. So this money system you just think about the earnings of businesses are out there and US government just went and took, you know, a big chunk of that earnings out, right? The question is is who pays for that? Where does it come that sort of thing? And that's where the professionals are heading Right now. It's still.
Glenn Royal:This morning we started to see the producer prices. Earlier this week we had consumer prices, our personal inflation versus business inflation, and the businesses are starting to see a little bit at the margins in different areas, but nothing yet to show any great signs. And that's the you know. President Trump's point is we're not seeing the impact on the tariffs. You know Wall Street was wrong about this. I don't know yet. To tell you the truth, I don't think anybody knows yet because again, it just hit last week in full effect.
Glenn Royal:We think what happens is we just finished the earnings period in the market, which had all of our attention, much better expected, looking for what? 2%, 2.7 or something like that growth and it came in up 10.5. It just blew it out. And that really was, because analysts downgraded their earnings so strong, just like the strategists when the tariffs hit and then they brought them back up to where they were before. Well, that momentum from that beat back down. That's what this market saw recovered.
Glenn Royal:Those analysts revisioned back Just back to where we were, back to the flat 10% or so year to date. Big return off those lows. But I think we're going to get whipsawed as we start. The Fed focuses on the data, data dependency, right, and those numbers are going to start being there. So expect a little more volatility. We did come out thinking that because of these high values, we would like to see a correction. I hate to say that, in a way like see it down, but I'd like to see prices correct, you know, 10% or so. That wouldn't feel good. But it's not the end of the bull market. It just allows people to pay.
Natalie Picha:The normalization.
Glenn Royal:Yeah, yeah, gets better price and keeps it going and that'll bring in some institutional investors. By the way, all these this 91% of the surveys all institutional investors are bearish on the market. Everyone else has said they buy their debt. So take that for what it's worth Exactly Recognition. We've got a rich market. It's hard to stay in that, but what happens is that market keeps staying rich and just keeps kind of trending up. You'll get the FOMO trade, you'll get the fear of missing out, it's not retail.
Glenn Royal:It's professional investors that have career risk on the line, and so you could see some money just sucked in by default, chasing performance.
Natalie Picha:Yeah, we've always said that, for the most part, for the people that we work with and our clients, we do our best to be risk managers. Right, we're always thinking about protecting to the downside, but there is something to be said for staying in that market, because you don't want to miss the upside, even when it feels like it's a bit heavy, which it does right now.
Glenn Royal:Yeah, and I think that talks about a lot about your plan and financial planning and sticking with your plan and knowing that markets do have their moments, but three quarters of the time you know they keep going to obtain your plan. So it's more short-term, emotional. It's human nature, it's you know, markets are driven on fear and greed. We, you know we talk about that quite a bit. Greed has been in vogue lately.
Natalie Picha:I can tell you that.
Glenn Royal:And that's another reason why you feel like maybe the markets are due for a little bit of a setback in here. When it's just bid up on air every day, you know the bond market should support it. We do have the Fed that'll start coming in. Cutting rates. That'll help it. If I look at forecasts for the year we talked about this recently where you can look at what the strategists say the S&P target should be, and 12 months from now, strategists are looking for the S&P to be about 2% below where it is today. The market's fully valued. On the other hand, if I look at the analysts that follow the stocks and we calculate what their earnings are and we do bottoms up, do all that math and lift it up to the top, the stock analysts expect their earnings to increase by roughly 10% over the next year. So they think the S&P, as a result of their bottoms-up work, will see a 10% higher. So I've got the strategists and that's that earnings story and everything catching up. We need clarity on that what the story will be. But my guess is that you're going to have a Fed that's going to be supportive of the market, possibly because of politics and that's something we should talk about is what happens when you influence central banks, particularly a democracy. We have a lot of records, history, that shows that whenever central banks that are independent are influenced by politicians, the interest rates are higher in the years that follow and their currencies are weaker. We don't want to see that here. So I would hope that now I can say one of the most effective tools and Teddy Roosevelt, he's talking about this bully pulpit right, there's nothing more powerful than having a 24-hour news cycle 10 feet from your step, 24-7,. Right, and that's the President of the United States. He can step out. Treasury Secretary Besant has posted that same pool right now, as important as he is in the administration. All they have to do is just talk this stuff, jawbone it. Jawbone it If I tell you to take interest rates down to one, from four and a half to kind of a one and a half.
Glenn Royal:Scott Besson's a hedge fund manager. He's worked for the best hedge fund managers in the world. Stan Druckenmiller's never had it down here, greatest investor in modern times. Right, he was his chief guy. Right, he's running Treasury somewhat like a hedge fund and he knows how to say things. But I'm really pleased that he is in the position he is. He wants to stay in treasury. He's going to manage the deficits 100% debt to GDP that we have now and growing. He's going to work on that through bill issuance. Short-term things they're trying to do, which ties us up to probably a greater risk in the market. It isn't so much interest rates, inflation earnings, it's structural Right and markets can have sell-offs because of structure.
Glenn Royal:In this case, what the Fed's been trying to do ever since 2008 is they've been trying to get away from being the support for the system through all this liquidity and the way they're doing it is paring down their balance sheets and different things. Well, one of the features they've been doing is called the reverse repo market where basically, banks park excess money at the Fed and then the Fed pays them some interest on that. But historically, the Fed those banks with that funds. They're the primary dealers in treasury issuance. They'd be buying the treasury paper to market it. They would use their capital to absorb it. So the Fed, by taking that, kept the liquidity in the bank and the banks pushed it out to the system. Now it's the opposite. The Fed's going to push it where the banks buy the bills as the dealer and that draws liquidity out of the system. That tightens financial conditions, makes it a little tighter, and I think that's probably going to be interesting because it's always potential for issues around that.
Glenn Royal:But we have to look at these tightening of financial conditions engineered by monetary policy central bank operations versus repo Right, coupled with not really out here. Everybody just drove off into the ditch on this stuff. But it has to do basically with that money supply coming back in the system. And if I don't have money which it's everywhere right now and it flows to risk assets risk assets you know that money flows into more stable assets, the inverse of what we have. So we've got to watch that money supply system. At the same time, china is stimulating their economy right their situation, all that Moving to prop up their commercial property market, their home market. They're doing it by allowing the provinces to borrow directly from the Chinese government and buy the assets. So they're doing everything they can to stimulate. If you get China stimulating at the same time, we're stimulating. That has the potential to create inflationary pressures globally. So that's something we'll be watching out for next year.
Natalie Picha:Yeah, we've had some recent questions about the China versus the US and where the dollar is going, and really you're just looking at the two biggest economies in the world being in very different places right now just very different places, as they're struggling to get back on board with their housing crisis and things like that.
Glenn Royal:Yeah, and then China. And then you have the global wars that are going on and the peace efforts that are trying to be made there, and those are all have the potential to impact global trade one way or the other. But nothing imminent, just something to keep in the back burner and watch. But the bottom line is we probably have a pretty good market setup in general. You had good news about except for the richness. That can be correct, it can resolve that. But you do have a pretty good setup. Natalie. Earnings are't you know. Earnings are beating. Earnings are expected to grow next year. You got the Fed. That's going to be friendly. That should set this market up to do well.
Natalie Picha:So I'm going to jump to a completely different subject here and want to talk to you a little bit about sentiment. You mentioned in our investment committee meeting on Monday that you know we kind of started out the 1st of 2025 with this idea that small business was going to do really well and that was a place to really move some money into. That really hasn't panned out and we know that ultimately in the short run, markets are more of a voting machine or popularity contest and in the long run, we know it's really more about data.
Natalie Picha:Right, it's about what are the real effects of what's happening in the economy. Yeah, what are your thoughts around just small business and sentiment in the market right now?
Glenn Royal:Interesting. It's an area that we need to watch super close because that's where everything happens. The sentiment surveys are largely probably tied along political lines, because I look back and historically, small businesses tend to do better during a Republican administration. I feel worse during a Democratic administration, at least from the last 20 years or so, 25 years, but lately. What was interesting this year? When Trump 1.0, small business sentiment was just through the roof, stayed there through the whole time. Covid dropped it and then, you know, bounced back and then under the Biden administration it kind of bounced with the COVID. But then the last couple of years sentiment was just in the toilet and then when Trump got elected, sentiment spiked back up. It's a monthly survey but post-terrorist the sentiment dropped below, back towards our negative trend. Just yesterday it came back just up, like three-tenths barely, but in a northward direction. So it's kind of flat.
Glenn Royal:I heard a stat this morning and it's something that we also pay attention to, and it's a cardboard industry. Cardboard is, you know, an indicator big time, yeah, and we cardboard sales down. Uh, you're seeing packaging sales that are down about five percent. So some of the small businesses that there's a couple hundred thousand small businesses in this country have 500 or less employees that import most of their product. And I'm just seeing an anecdotal guy that makes knives in Wisconsin looking to expand. He's going really great, business is doing great and he wants to expand. The equipment comes from China and it's going to cost him an extra $130,000 for this piece of equipment up 30%. But basically it takes the profit margin out for him to expand. He can't expand because of that. So that's the dilemma.
Glenn Royal:The big businesses that we're largely invested in, we can handle that. You know they sell fun, all kinds of things. Smaller businesses will struggle so the costs are harder for them to bear. You throw in a situation where you start pumping in lower interest rates. It gens up the economy, the demand for labor goes up and I have less labor. So that'll be. Another challenge for small businesses is hiring labor to meet these new demands. So those are all transition issues to this new America-first economy where we're reshoring manufacturing. That's just part of it. So it's probably the growth the turn. Maybe we stick it when we land on our feet and everything will be fine. You know, that's the hose.
Glenn Royal:The transition is the cost.
Natalie Picha:The transition is the cost and what is the lag effect. You know, over the next three to five years, certainly, the labor market is going to feel the squeeze and continue to feel the squeeze.
Glenn Royal:AI may you know AI's productivity tools so you could see some benefit on labor, some offset. But I did see some pretty cool technology where robotics are being used to pick strawberries and things like that. So very delicate and actually better because it's a delicate. You know that repetition robot, so they're going to be doing some things. A shortage of labor will generate necessities for technology.
Natalie Picha:Yeah, and I have to ask this was a big news item this week the NVIDIA and AMD deal with the 15% you know. Coming back to the US on exports, what are your thoughts there?
Glenn Royal:You know, part of me just thinks it's another story in this administration to try to understand that. Because the 15% so it was AMD and NVIDIA on certain chips that are allowed to be sold to China. The US is applying that for a 15% haircut off the profits of those chip sales to China. We've never had a tax put in the front end of that. The tariffs are always on the back end, not on the front. I'm not sure constitutionally if they're allowed to do this, but I did see where Scott Besant said that this might be a new model for they look at other businesses to do so. That's a new wrinkle into the system. Are we now going to have to be or corporations going to be charged to do business and other locales, particularly with security, sensitive type products? I don't know how this develops. I don't know how this develops. I can't say. The initial reaction was that China said they did not want these particular NVIDIA chips. Post that conversation because they're concerned that they'll have GPS and shut down tracking like type devices, everything that we accused China the last few years. Now they're accusing us. So that's politics. It's gotten involved with business. Accusing us, so that's politics. It's gotten involved with business and really, you know, it's the business community that's just getting us to punch and bag on all this, and we've got lens down.
Glenn Royal:The 2017 Tax Cut Act allowed businesses to grow their profit margins up to very, very healthy 14% on average. That's super healthy. Up from 20 years ago, that was 6% to 8%. So all that tax cut went into corporate profits right, they're the corporation that did it. That's what we've got to watch that margin. So that's going to determine stock prices going forward, because if that margin starts to get squeezed that profit margin businesses are making we go to Walmart's example I've been showing. Walmart's profit margin is three cents on every dollar. That's their net operating margin. They don't have any room to squeeze that. Yeah, so you start getting pressures. That starts affecting the profits. The stock goes down.
Natalie Picha:Right, but we also get, which is also, in turn, going to affect liquidity, right. So right now, there's just so much cash in the system, you start to squeeze and you squeeze in all areas at the same time.
Glenn Royal:Drain the punch bowl, even though you're not putting liquidity into interest rate cuts, but you're draining the money supply. It's kind of a weird thing that's going on Another place.
Glenn Royal:Right, it's not a full pump of liquidity in the system, right, so it may be the Fed trying to. Anyway, I don't want to go there. But you know, outsmart the box? I don't know, we'll see. But just, you know, every day is a new day. Every day is a new day. What I didn't know, they could do that thing so, and that's, it's just the way we are. So disruption, ideally. You start to hear more things like GE returning manufacturing washing dryers, things like that, back to the United States. Oh 3 to that, the reshoring manufacturing. So we'll see how this plays out works. I think it has the potential to be very good economically good for your stock portfolio.
Natalie Picha:I just don't know the soft costs outside of that up recently is the growing number of corporate treasuries that are now holding cryptocurrencies, yeah, and we're talking about real-time trading 24-7. And you had actually put out a chart for us this week just on that subject alone. Do you have any thoughts you'd like to share on that? Because that's interesting and that's forward-looking for sure. Because that's interesting and that's forward-looking for sure.
Glenn Royal:It institutionalizes the product. The fact you have a crypto czar in the White House that's driving a lot of these changes. Adoption it's the beginning of wholesale adoption of crypto. One of the reasons that we got into it. It was kind of legitimized institutionally. Now there's a wrinkle with that and that's the stable coins. And I'm trying to understand this better because we're getting risk.
Glenn Royal:In crypto, the stable coins will be backed by treasury bills. So think of a bank using treasury bills, like in 2008, or treasuries. The bank started having problems. It pulled down, had the potential to pull down the whole financial system. Central banks had to come in and bail them out. Are we in the same type of situation? If I have an event risk in a stable coin that's tied to our treasuries and the Fed now has to come bail out a stable coin? I don't know, is it similar to banking type operations? You know we're trying to understand that a little bit better. So that's the one thing I'm kind of really trying to understand better. Stablecoin legislation that's that digital currency probably really legitimizes Bitcoin and Ethereum. Legitimizes Bitcoin and Ethereum. The other stuff, the memes and stuff that's still collectibles and doing their own thing, and I'm not as familiar with that area.
Natalie Picha:Hmm, well, I certainly appreciate these conversations, and I know that our listeners do too. There is a lot going on in this market and whether we're talking about up markets or down markets, our goal for our listeners is for you to walk away having a better understanding of what to listen to and maybe what not to listen to out there in the media, because there's just so much noise. So we really wanted to kind of break it down for you what we're thinking about, what we are listening to and paying attention to. So before we go, glenn, is there anything else you'd like to touch on today? I mean, I feel like we jumped all over the map a little bit. We usually do.
Glenn Royal:I know, just let the clients know If you have questions. We're always here, everybody knows that. But I just want to reiterate that Reach out, ask us anything in the portfolio what's going on.
Natalie Picha:We'd be more than happy to talk to you. Yeah, we love to talk about this stuff and it actually is a lot of fun to do this podcast too, because it gives us an opportunity to just kind of riff about whatever's going on in the market. So, for our listeners, please don't hesitate to reach out. Thank you, glenn, for sharing your thoughts and your expertise with us. If you enjoy our podcast, please take a moment to subscribe. We would love it if you'd leave us a rating and a review, as it's the best way for us to reach other listeners, and we'd also love it if you'd share our podcast with your friends and family.
Natalie Picha:We're always looking to help more individuals. It with your friends and family. We're always looking to help more individuals. It's what keeps us going every day. You can find us on LinkedIn and Facebook for additional content, and if you have any questions or you want to discuss today's subject, please reach out to 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. Li steners 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.
