RHP Market Talk
Financial market insights from RHP Wealth Management in Houston, Texas.
RHP Market Talk
A Deep Dive on Bonds.
Join us for Episode 39 of RHP Market Talk, where Natalie Picha, Chief Experience Officer, and Glenn Royal, CFP®, Chief Investment Officer, discuss the bond market, the risk associated with Nvidia, and the intriguing concept of market contrarianism.
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Welcome to RHP Market Talk , Episode number 39, produced by RHP Wealth Management, an Independent financial services and investment advisory firm based in Houston, Texas. I'm Natalie Picha, Partner and CXO, and I'm super excited today to be rejoined by our very own partner and CIO, Glenn Royal . Hey, Glenn...
Glenn Royal:Hi, Natalie. Thanks for having me. It's a pleasure to sit at this table with you.
Natalie Picha:Always. It's so nice that we're going back to the old days, right? Where it was just you and I having conversations about the market. So, I'm really excited to have this conversation today. And I want to say a shout-out and a big thank you for our Episode 38 special guest, Dean Ed Waller. What an interesting interview that was.
Glenn Royal:I really enjoyed that. I listened to that twice now. I enjoyed it so much. But I have a lot of respect for Dean Waller and everything they're doing over at UH-Clear Lake . It's pretty exciting.
Natalie Picha:Well, if you have not had a chance to listen to Episode 38, I encourage you guys to go back and listen to that because it is a deep dive. You talk about the academics on the market, he definitely brought it.
Glenn Royal:Yeah. You should go to lunch with Dean and me, and you may get kicked out before the appetizers are over with . We have a lot of fun.
Natalie Picha:Oh, man. Great information. So this is kind of, like I said, going back to our old style of doing these podcasts where you and I get to talk about markets and go a little bit deeper than you usually do. Now that you're doing those monthly market minutes, which are those short pieces about the market, we kind of want to dig in and talk about where we are for the summer and what this year has looked like and just kind of give our listeners that little bit of an expanded conversation around what, what's been happening. So I think I want to jump right in your last market minutes; we talked a little bit about bonds and being a generational opportunity and what that setup looks like going forward, not just for this year, but maybe, you know, for many years to come and how that sort of, you know, ties in with where we are with the fed rate hikes, those sorts of things. Why are you still seeing bonds? Is it just this amazing opportunity?
Glenn Royal:I know I've been pounding the table a little bit, haven't I?
Natalie Picha:Yes, yes, you have.
Glenn Royal:I'm kind of strong on fixed income, and, you know , first off, I want everybody to know my background a little bit, and when I started in the industry 40 years ago , I started as a securities trader, primarily in equities. And then our, the bond trader at the shop I was at , took another job. And so I started filling in for the bond trader just on...just until we hired someone. Well, I did...I did pretty good at it. So , we ended up...I took over the bond trading responsibility as well. So at the end of the...
Natalie Picha:I have to ask, how old were you
Glenn Royal:At that time? I think I was...I was 26.
Natalie Picha:Isn't that amazing? 26 .
Glenn Royal:Yeah.
Natalie Picha:Wall Street Bond trader. Age 26.
Glenn Royal:Yeah. With a bunch of other young guys and women. It was... It was great. It was a great experience.
Natalie Picha:That's pretty cool. Historical
Glenn Royal:Historical career. But but you know, as we, what I'm really excited about and PIMCO was the one that had the piece about bonds being a generational opportunity came out with a week or so ago. And really, they're talking about the reset in rates. If we go back, you know, two years ago, we had the 10-year treasury yielding about a half a percent. And today, that's yielding, you know, four points a quarter , right? When we started pounding the table on bonds, yields were higher, about 4.7. now, they've come down a little bit. But I think they still offer a lot of attractive opportunities here.
Natalie Picha:A nd what does that mean? I mean, I know that we just had a Fed minutes just came out a nd we just had another discussion around that. The market had priced in two rate cuts for the year. Now we're thinking maybe only one. Talk a little bit about what that means for bonds.
Glenn Royal:Yeah. So, part of the struggling...the reason why the Fed will be able to cut rates is because they think they have inflation under control. Right? That's what they've been talking about ad nauseum. Having the Fed send a signal to the markets that it's no longer fighting inflation, it's more focusing on labor or the economy, that sort of thing. And it could just be a messaging signal, like , you know , of a quarter of a point cut. We just saw that in Europe. The ECB lowered their interest rates by a quarter of a point , uh, with, with further language after the, you know, the press conference saying that that's it. We are still in a data-dependent mode. So they're not on a trajectory of lowering rates. Right. They're just no longer raising rates, and they're trying to stop and see where inflation settles. The data's looking favorable for cuts, though. And as you point out, too cuts. And that's what the market is saying . Now, the federal governors, you know, one of the, the most effective policy tools a federal governor can have is we call it the jawboning. The jawbone is the talk. So they're talking one cut, but they're data-dependent. And we can talk a little bit about that, but that's where we're starting to see the data starting to show some signs of weakness. Last year in the second half of 2023, GDP was running about 4.1% or so. This first half, it's down to 1.9. So we're getting a slowing of growth. And that's good if you're a bond investor, you know, if I started getting a slowing growth, that does tend to bring inflation pressures down, and that makes fixed rates that you get out of bonds that much more attractive.
Natalie Picha:Right? Right. Right.
Glenn Royal:So that's one of the reasons I'm really, the other thing is I, I've noticed in the bond market, I think what really, really gives me comfort in owning bonds is, you know, we talk about the big, the democracies around the world all having elections.
Natalie Picha:40% of , yeah . Where are we in the geopolitical landscape right now? So
Glenn Royal:So you're seeing those, and so you're seeing different factions in Europe that are a little bit more concerning for debt markets when , Marin La Penn's party in France against Macron. But what we see in those situations, there was also in Mexico, you had a blowout , uh, where the ruling party won all, all the branches. This is another thing that's kind of scary for professional investors, because if I get somebody who wins, like if I had one party win all three branches in the United States, we know that policy's going to get done.
Natalie Picha:Physical policy, right? Things are going to change, things.
Glenn Royal:Will change. And so what happened, the equity markets in both Mexico and France sold off sharply on that news Europe across the board on this election news. But what I saw, my canary, a coal mine, was that the debt markets held in pretty firm. You had that old traditional flight to safety. Yes. That went back to debt markets. So I have this summer set up; I have a year where I've had AI drive the stock market. It's all the rage, NVIDIA, right ? Yeah. Right. It's everywhere. All the other companies will benefit from it, but it's been a pretty narrow leadership market. You know, it's just basically those Mag Seven stocks that are driving, you know, we're at 14% or so year to date; the Mag Seven's responsible for that. If I look at the other 453 companies or 4,93 companies, it's, more like 4% gain. So it's really a concentrated market. That's a risk that we see that makes me feel comfortable owning bonds as an equity investor because I'm getting, you know, 6% plus cash flow in my debt. Right. And that's good,
Natalie Picha:Right? I think so what you're saying is, what we've always talked about, the balanced portfolio, the 60/40 is , you know, the term that you hear thrown around. Where bonds are your really are your risk off buffer, right? We're back to that world. Where they really are in a place where we've had 29 record highs this year. This bull run started back in October. With narrow leadership. It's all in tech—that bond market piece. I think we really need to lean into that. You know.
Glenn Royal:I think it's certainly, I mean, and the n, the nature of running our portfolios, um, is we're long-only managers. I mean, we don't sell stocks short, we don't sell stocks. We don't own; I don't use options as a hedge against these portfolios. So, in that case, fixed income is a pretty good hedge. Yeah. And if I go to 60 40 or if I'm at a point and you've had some tremendous lift in the markets, you know, this , we've seen these asset levels just explode. Right. It's always worked , you know, having a discussion about, hey, our bond's right. For me. Right.
Natalie Picha:Well, and, and I know we've, we've talked about this in the past, but I'm going to go there again because I just want to make sure that people have a good grasp of the bond market as a market. And again, let's go back to you trading bonds at age 26, right? That, that if we get those two more rate cuts this year, if we get two rate cuts, what does that do to the bond market?
Glenn Royal:Because the bond pays us a fixed coupon, the majority of bonds, let's just call it five in our example. 5% fixed coupon. Yep . That five I get no matter what, assuming the credit quality ,
Natalie Picha:Right? Right., right . Of course.
Glenn Royal:Of course. Yeah . Still in business . But I get that five no matter what; if I'm in a situation where the Fed is lowering rates, they're driving down the lower overall cost of money that makes my 5% bond, where world down, the Fed is issuing bonds at four. Yep . I've got that five. It's fixed. People are going to pay up,
Natalie Picha:They're going to pay more for that.
Glenn Royal:For that extra 1%. Right. So we're in a situation where I can get what we call total return out of the bond market. I can get capital gains. People willing to pay us more . because we only use higher coupon bonds in addition to that high coupon Right . That I'm getting coming in. So that gives me, right now, like I'm saying, if I can take 40% of my portfolio at 6% or more... And this is the other thing that's cool about bonds, and most of us will have a real-life example of this. Is that a few years ago, 2023, when the bond market sold off, so sharply, coupon yields were very low. The interest rate we were getting on bonds was, you know, one 2%. So if I'm down five, I don't have the cushioning effect of the bond portfolio price.
Natalie Picha:Right . Of the value.
Glenn Royal:Right . because I don't have that coupon there to offset that. So now with the five plus percent coupon, you know, if the bond market's down 5%, I'm flat.
Natalie Picha:Yep . Exactly. Right .
Glenn Royal:Exactly. Or before, I might've been down eight, nine, or 15%, who knows. So, coupon's favorite investors. Right . And we're there, and I'm pretty excited about it .
Natalie Picha:And it's real cash flow . It's real cash flow .
Glenn Royal:Now I want people to be aware of this is the bond market. And when I say bonds, you know, you're thinking we're sell Chevrolets. You know, blue collar Chevrolets. Right? It's not just a one-and-done treasuries. The bond market's like a supermarket. There are all kinds of investments out there. My position right now is that you know , maturities that are five years and in are basically controlled by policy rate by the fed, whatever they want to do. When I get out beyond five years in maturities, then I'm more focused on fiscal policy controlled by governments and politicians.
Natalie Picha:Yeah.
Glenn Royal:I don't... I'm in a situation, the bond market, where I want people to understand where we are positioned in today's market. We're positioned in shorter maturities that understanding that policy rate decision. because I feel the feds in our favor on that. We'll lower rates that'll favor us. I don't want the longer maturities because they will be exposed to budget deficits as we start dealing with deficits, which, and what I don't hear, take a little segue over to politics for a second. I don't hear from either major candidate any discussion about fiscal deficit reform there , there's nothing about controlling spending. No one's talking about it
Natalie Picha:Kicking that can down the road, but it's going to come to, it's going to come to bear someday .
Glenn Royal:It will ; it always does. Have to pay the piper. And so, and those increasing interest expenses are actually crowding out other needs. So if I...on the federal budget, so there are some things here to be a little careful about, but I, if I'm out beyond five years, again that , that's more towards politicians. I don't see that. So I want to stay in shorter. Worry about that policy rate. The other thing is, when I get into bonds, there's treasuries. Then there's corporate bonds, high yield bonds, and asset-backed securities. We're finding value in those shorter maturities and asset-backed securities and corporate debt, over treasuries. And I'd be paid more income. For right . Perceived risk of owning that over treasuries. But all in all, with the nature of our economy. And the strength of the economy, I'm comfortable with that credit risk. So we're leaning into risk at the short end of the curve. And that's giving us a really, really good year in bonds.
Natalie Picha:So let's talk a little bit; I'm going to circle back around to that idea of bonds as that risk buffer. You just said how much buffer you're getting if you know you have this risk off event. You're still seeing that flight safety into bonds , uh, geopolitically when we're seeing that around the world. And let's talk about those 29 record highs this year and Nvidia, right? So much of this market leadership has all been in tech, but Nvidia particularly you and I were just having a conversation about the size and what does that look like for markets? Where is risk kind of built into the fact that we have this very, very small leadership in the market. And then Nvidia, particularly.
Glenn Royal:You . So the risk is that if Nvidia simply meets its earnings expectations, what's driving this stock is they've been beating earnings expectations by a wide margin quarter after quarter for over a year now. It just really, really been going strong. If we have a quarter where Nvidia just meets and doesn't beat , that could be a trigger to have a little market correction in here. I'm aware of that. When I look at Nvidia, it is surpassed Apple and Microsoft in the last week of those world's most valuable company, it's increased $2 trillion in market cap in the last year. Wow. And when looking at Nvidia, 60 to 70% of its revenues comes from 10 customers. Now they're the big folks, as you can imagine. But if I compare that to, you know, Microsoft and Apple, the two and three largest companies in the world , their customer base is thousands and thousands of people. Right . It's very diversified. Right. So that's something to watch with Nvidia. If I get any spending slowed down by their major customers, and they just meet earnings, or God forbid, if they miss, that could cause a pretty good little correction. Now where we are in the market is, we see there , there's really two camps I see slowing , of the economy, talking about GDP coming down. which bodes well for bonds, the unemployment rates slightly ticking up. We can talk a little bit about Sahm Rule I wouldn't mind saying something about, but we're starting to see that kick up. And so I think that we have to be kind of careful here on the earning story for equities going forward. We do expect profits of about 9% this year. 14% profit growth next year. You know, so we're in a situation, it's kind of like the nineties. It's a little bit of Goldilocks. Everything's really working quite well for the markets, and it can continue. But I need to see broadening out of economic strength to the rest of the market. I need to go beyond these top stocks. A lot of strategists think that's going to happen in the second half of this year. Time will tell. And that's what we're looking for. So if I get a broadening out of business conditions, small caps, all these that are, we've been thinking we'll do well, they actually start doing well, then boom, this economy keeps going for, you know, several years. We're in pretty good shape. But if I don't get that pickup in the broader economy and it's just these few stocks, then the risk of equities is higher. Makes me want own bonds that much more.
Natalie Picha:Right, right. I want to talk a little bit...I'm just going to kind of jump off topic here and talk a little bit about being a contrarian because I think we, we see, when we talk about how people feel about the economy and the market coming off of Covid in 2020 and things like that, there has been this sense of still the, the markets are all, you know, we're setting ourselves up for the big drop right. Somewhere. Yet the data continues, and we continue to see a strong economy. We keep going and going, and we're, like I said, setting all these market highs. I know that we've talked a little bit about this in the past, but being a contrarian is sometimes like woo, you know, people start to jump in when the markets are doing well; they tend to jump off the rollercoaster. Yeah.
Glenn Royal:Right.
Natalie Picha:You know, at that , when markets are down and, I'm just thinking about like you said, the setup for this economy going forward.
Glenn Royal:Yeah. So most of you know, having been a trader , that's just experience from being on a desk markets all day long.. And there are moments when being a contrarian...and basically it's , it's going against the madness of the crowds, right? You start getting group think , everyone starts going well, and you can see one sector tech, large cap tech. And everyone's like the holy grail. That's where we all want to be. That's when it's okay to start, in my mind to start looking for the exit or thinking differently Then the crowds. The danger with that is you're wrong, you know.
Natalie Picha:Yeah.
Glenn Royal:And it just keeps going higher. And that's the case with NVIDIA. You know, here's a stock that you could have gotten out earlier on based on valuation trades at 40 times earnings, you know, but it's growing earnings so fast that it can grow into that multiple. But if you did it on that basis or you thought it was too much, you know, NVIDIA's a 140 50% for the year, you missed it. So, wow. It's a very, it's a difficult trade to do, but I think having a contrarian always looking for the opposite of the crowds is a pretty good strategy. And it does work, but you , it takes a little bit of skillset .
Natalie Picha:I'm going to bring something else up that, that a lot of people probably are not aware of because we...there's a lot of things that happen in the market that are just mechanical. It's just the mechanics of the way things are set up. And so there's a couple of things out there that people may not be aware of today...quadruple witching.
Glenn Royal:Yes.
Natalie Picha:So talk a little bit about that and what that could do. because it, it definitely is going to put some pressure on the market.
Glenn Royal:It creates a lot of volatility. I think I heard something like five and a half billion or some kind of dollar value going to trade a day related. But it's the , it's a simultaneous expiration at the end of the quarter of futures and options on stocks, indexes, and, now, ETFs. So this is the settlement of all that futures options trading. . is it? Do I roll it to the next three months, or do I cash it out? So t he day t hat, like today is a lot of mechanical artificial trading that, that happens on these quadruple w itch third Friday
Natalie Picha:Right. because it's the expiration.
Glenn Royal:So I tend, as a trader, my experience is that these are, you know, noisy signal days, and I don't put a lot into it. And I try , I tend to avoid, I sit on my hands on days like this. But, but noisy signals is, is really what we're talking about. How do I separate true signals in the market, right . Versus noise signals. And I think to the noisiness is in the market right now, you're seeing a lot of volatility, little chop on noisy signals, inflation data, things like that, that may be more trading than the reality of the data.
Natalie Picha:There's another mechanics to the market that started on May 28th. So we moved to a t plus one. What that talks about is the settlement of trades, which, you know, we've seen us go from three to two and now t plus one. And for us, in the investment world, it's a lot to deal with. It is, um, what that means is when you trade something, it settles the next day.
Glenn Royal:It's pretty good for the...for the client. If they need cash, you know, next day the cash is available. Right. It can be wired out. It makes it a bit more challenging. When you, like we do over a hundred thousand trades a year across the board, all accounts. That's a lot of activity. I wish I could say we get all of those flawless. We make them all perfect. We try. We strive for that, but errors do happen. So you have to cancel. Correct. Wrong account number, this or that. So T plus one shortens my timeframe to correct administration errors and makes us a little bit more nervous. We want things done before the market closes at three o'clock central time. And I don't have that extra day to take care of that stuff. So we're...you know that we will , we'll see how it works out. I'm not sure how it's going to work out on foreign currency and different, you know...
Natalie Picha:It changes things.
Glenn Royal:It takes take time to settle. There's some complexity. But so far, this happened the day after Memorial Day. Here we are three weeks into this and I've not...I'm not hearing of any issues in the markets. So, it seems to be working okay.
Natalie Picha:Yeah. Yeah. It's, again, mechanics that I'm not sure all of our listeners may be aware of. You know, things that we, we deal with on a daily basis.
Glenn Royal:It's quite a few...portfolio construction. And we can always go into some big deep dive on that about how we limit exposure to the stock. Sometimes they'll...I've had some calls recently, I see that you sold XYZ and my response is , we're still long XYZ at our full percentages. But as far as portfolio discipline. Right . I had to trim profits every once in a while . Take my profits. It's okay to take profit. Yes. You're, you're never going to go wrong by taking a profit. Believe me.
Natalie Picha:That's right. That's right. Well, like I said, this was going to be an opportunity. I've enjoyed this conversation because it feels like, you know, episodes 1 through 10 or 12 or something like that where we just get to talk about all the things that are going on in the market and the economy and looking forward to the summer of 2024. Hoping that it's a, it's a quiet summer.
Glenn Royal:It can be...we still have the vacation hangover covid, right ? last y ear everybody went on vacation, right? I t hink this year there's still out there. So I suspect if, you know, we're not going to have a lot of activity. We have a fed meeting in July, September, November and December. July i s probably no g o, right? , we don't see anything. We still got a little bit, they need more data t o inflation d ata t o come their way. ah. September's on the table though. That's a live meeting. Quarter of a point probably on the table. November 7th F ed meeting too close to the election, right?
Natalie Picha:Yeah . They're not going to do that.
Glenn Royal:Now I will say this, they don't care about politics. They care more about the economy. If they thought our job labor and all that was getting wonky...they would move based on the economy, not the election. Of course they'll get all kinds of grief for that, but they'll do it for that reason. And so that puts the December meeting. So I would say September and December, are the four remaining meetings this year are the two live meetings where you'll get, l ikely get a q uarter of a point c ut. Yeah. Which buds w ealth for bonds.
Natalie Picha:we'll really be watching. That's right. Thank you Glenn. I am so appreciative that you wanted to stop today and share all your expertise. This has been a great conversation. I just wanna say thank you to all of our listeners. Please take a moment to subscribe to R HP Market T alk. Leave us a rating and review. You may also find us on LinkedIn and Facebook for additional content, which includes our Market Minute, where Glenn shares his market and economic insights each month. If you have any questions or want to discuss today's topics, please get in touch with us through our website at www.royalharborpartners.com. Thank you Glenn.
Glenn Royal:Thank you Natalie. It's always a pleasure.
Natalie Picha:Alright. Until next time.
Glenn Royal:Next time.
Disclaimer:Royal Harbor Partners is a registered investment adviser, and the opinions expressed by Royal Harbor Partners on this show are their own. Registration as an investment advisor does not imply a certain level of skill or training. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. The information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.
