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
Politics are Politics. Markets are Markets.
With just 1 week left until the crucial 2024 Presidential Elections, the tension is palpable, and the stakes are high.
Natalie Picha, Chief Experience Officer, and Glenn Royal, CFP®, Chief Investment Officer, discuss uncertainty in financial markets during election cycles, proposed tax changes, and the U.S. deficit.
This new episode of RHP Market Talk is a big one!
Additionally, we are providing links below to articles discussed in this podcast for your convenience.
Link to the BlackRock 2024 Election Year Special
Link to U.S. Department of the Treasury Budget Proposal
Link to JP Morgan Asset Management Elections Insights
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 41, 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 today, our CIO and partner, Glenn Royal, joins me. Good morning, Glenn .
Glenn Royal:Good morning, Natalie. Good to see you...and it's always good to be here.
Natalie Picha:Excited, excited for this conversation. I know that everybody's a little bit nervous. We are just about two weeks away from at , at the record at , at this time when we're recording, we're about just a little less than two weeks away from the 2024 presidential election.
Glenn Royal:You can tell by how gray my hair is getting. I'll be snow -white here in a couple of weeks. , but now, it's all I'm joking. It's all good .
Natalie Picha:Well I'm, I'm looking forward to this conversation. I know that a lot of our clients and listeners are probably anxious to hear this. We...as a matter of fact, it's interesting...still to date, our last pre-election conversation has the most downloads and the most listens. So , I know this one gets a lot of attention.
Glenn Royal:It sure does. And understandably so. I mean, it affects our daily lives. And , particularly with the heightened campaigns that we have today, the rhetoric , uh, it makes us, you know, a little more nervous gets our attention. And that's natural, right? That's what they're trying to do. Make you make you scared. So you'll vote for them because they'll fix your problems.
Natalie Picha:Yes. Well, and for those that did not have an opportunity, I just want to point out that earlier this year, we had an absolutely fantastic event where we had the BlackRock election year specialist. He really is what he was; he had all the data points, and not everyone got to attend that, but it was a fantastic event, and we got a lot of data. And there are some of those data points on our website as well. So, if you're interested in really digging in deep into what happens in election years and how that works with markets, we encourage you to go there and check that out. Because it's, it's good stuff.
Glenn Royal:Yeah . And I think probably , what happens where we are right now is the uncertainty. And that markets don't like uncertainty. But what we've seen historically, with the exceptions of the dot-com era, 2000, and 2008, is once we clear the election, the markets tend to lift higher because we clear that uncertainty. But I'm, I'm ready to get the election behind us.
Natalie Picha:I am, too. I'm really ready. You know, and I think people tie a particular outcome to what the markets are going to be like post-election, obviously. What would be the best case scenario for this election would be just to have a very clear winner? We know exactly where we're going. Because the markets don't, like, as you mentioned, the uncertainty of not knowing. Yeah.
Glenn Royal:And I kind of like a divided Congress. I don't like a sweep. You know, sweeps. Once you start sweeping, you know, one party has all the control, and then you know, everything can be done. And that's n ot necessarily a good thing for financial markets. Because it's drastic changes at times, and we have to adjust to that. So I'm hoping for a divided whoever wins at the top ticket, as long as, you k now, the, the house a nd the Senate are a little bit different m akeup. And we can tell, I mean, we can get into some of this analysis if you're g oing t o get into that. B ut y ou're, you know, the main things between the two candidates are trade and tax policy. Right? And then neither of them is talking about fiscal policy, which is the budget deficits that we're seeing. Right. Most of them a re talking about raising revenue for other spending programs. There is a belief that these programs will generate additional revenue like small business investment or tariffs that bring back investment here to the United States. and that's understandable, but I really, I think the main driver that people need to focus on is that we h ad a very friendly macro outlook right now. And that probably will be the biggest driver other than the candidates. Once they get in office, t here will be some changes. And again, it determines that mix. Right now, you know, the betting markets are the most predicted outcome in the betting markets, which i s a Republican sweep. You started to see the stock market p lay into that in the last few weeks, three weeks, where you saw energy stocks, you know, different ones that h ave b enefactors, healthcare stocks, financial services that would benefit from deregulation under a Republican party start to move higher. So, markets are kind of at the margin p laying that game. And that's the traders amongst us that do that—the trading mentality. But I'm kind of, y ou kn ow, say I'm in the camp that divided government is the way to go. The second biggest predictor right now would be a Harris presidency. And a d ivided Congress. Republicans take the Senate; Democrats take the House. That may not be a bad thing. Because we can talk a little bit more in a m inute, bu t a b out h ow the policies of these presidents would be impacted with Congress. They ha ve t o work with that body. And a lot of things that you're hearing, touted right now, ne e d co ngressional approval.
Natalie Picha:Right. I always tell people when they get very worried about what, you know, what's going to happen to me if this party or that party wins? And I always say nothing happens immediately. Everything takes some time. And so we'll have a little bit of a front end with whoever gets elected before some of these things can immediately start to happen. Right.
Glenn Royal:Some things, you know, presidential powers , uh, acts give the president the ability to do some things quickly. We could see the Emergency Powers Act of '71. I think Nixon was the last time we saw this enacted. A president can put it across the board tariff up to 15%, but it can only be for five months. So it's possible we could see President Trump, if he's reelected, put across the board 10% tariff , uh, that he's talked about target Chinese tariffs at that 60% rate. If he goes 10% across the board, again, I need congressional approval in five months to maintain that. Right. That in itself, you know, some of the analysis that we're seeing out there on Wall Street is saying that's not enough to really affect the. If he's focusing on China, excuse me. The tariffs have to be on China right's focusing on Chinese tariffs. If I overlay across-the-board tariffs, then that's where we start getting in the broader impact of the retaliatory tariffs, the different things like that that we do see impacting economic growth and, possibly increasing inflation, which will cause the Fed to have to raise rates to fight that inflation. Right. And then we get into that tightening cycle of a Fed as a result of that, which means , we start crowding out , discretionary government spending. You can't, you have to pay your bills on your debt. So the government's not any different. It has to pay this interest expense. And with the Fed raising rates from a quarter to five and a half and the sharpest increase in post World War II period, we're now seeing that cost, that bite comes into the federal government for our debt. And these policies, most of the things we're seeing, will increase the debt. The Republican side believe s that their policies are going to be revenue-neutral. The tariff income will offset any downturn in the economy, uh, where the Democrats think that any tax cuts will not flow through to deficits, and you'll end up increasing deficits. And I got the Republicans thinking the same thing about the Democrats. So, it's , you know, it'd be good when the election's over, right?
Natalie Picha:You know , that Yeah. All of that, all of the pre-election sort of rhetoric and conversation. It does not necessarily flow to the actual data points that we sometimes see. So it's both sides , making their case.
Glenn Royal:It is . And so I kind of want to make the case of politics. You know, basically, you've got Harris, saying she wants to extend the tax cuts. That's going to be the first thing . The tax cut , Reconciliation Act of 2017 that lowered everything, corporate taxes across the board. Harris wants to keep it, you know, at $400,000 or lower , keep those tax breaks in place, but increase the taxes at the higher end. And we know there's some discussion going on about the w ealth tax right now. W e c an t alk about that. But basically wants to extend the tax cuts and make those 2017 permanent. So that's kind of your difference in tax policy, right? That I see at the top level. But that, let's talk about that wealth tax. I know you're getting a lot o f questions.
Natalie Picha:Yeah. So Yeah . Let me...let me frame that out just a little bit because I think that, I know, we start getting a lot of questions about, well, how's this going to affect me and my personal investments. My personal wealth. And that 2017 tax, you just mentioned under Harris, is looking at extending the cuts for anyone at the $400,000 or less. Anything under $400,000 in, you know, income. And then anything over $400,000, right? That's where they would lose those, those tax cuts. But I had a question even just last week about capital gains t hat there's a lot of kind of buzz out there that they're going to start taxing unrealized capital gains. And then I had someone ask, well if my capital gains...if I'm doing well in the stock market, you know, I'm going to make less money. And so let's have that conversation, because those are the questions that are coming up right now. I s i t all on that capital gains tax?
Glenn Royal:We like to go to the horse's mouth for information. So to speak. So we went through the Department of Treasury and their website, and President Biden's budget proposal is all there. You can read everything. For yourself. You don't need a reporter. You don't need some influencer telling you what to do. Read it yourself. We can share that paper with you. And in it, you'll see that it's only for people that make a hundred million or more a year and adjusted gross income. So it's proposed a 25% tax wealth tax on those that make more than a hundred million dollars a year, which is basically about 2000 families in the United States, would not affect anyone else. There are very few I don't have...I don't know of anybody, our clientele, that this is going to affect in our business. I don't think it's g oing t o have any impact at all. So that's something that is politics t hat caught fire. With that, and they've taken it to a whole level a s t hough i t's going to impact everybody, and it's just not true. It only impacts those...what is interesting, we were talking a little bit before this podcast. But I just saw yesterday on t he Bloomberg news articles p assed that Kamala Harris is actually kind of backing away from this hype. She's not talking about it. She's explaining herself as being more pragmatic. Whatever that means. But that's the fact that she's not tying into some of these Biden policies probably says that she realizes people are concerned about this. You know, taxing wealth. And the way they're going to tax the unrealized capital gains on these folks is basically a credit at the end of the year. If you have an unrealized gain, you're going to pay tax on it i n this proposal by the end of the year. They've a lready got it figured out how they're going to do it. And then, let's say that asset declined in value, then when you sold i t, you would get a credit back for those taxes you paid. So they figured out a ways, it's basically a credit f or unrealized gains. You're paying it. But it's on the books a s a credit until the disposition of that asset. And w hy they're kind of pushing this is that these families, which are typically billionaires, you know, they're very, very wealthy families. They use these appreciated assets as collateral for other things they do. And in their mind, you know, that's a use of the appreciated assets, e t cetera. I don't think...personally, I think it's just an attempt to try to get some fairness i n the tax code w hen the billionaires have so many tax loopholes at their disposal and the best tax advisors in the world that they take advantage of it. Frankly, they pay less than the average citizen. Is this the right way to go? I don't know. But should there be fairness in the tax system? I think that's an evolution both parties should focus on.
Natalie Picha:Right, right. Let's talk a little bit about the fact that politics are not necessarily the biggest drivers in the market in the long run. So I think you and I had a conversation, you know, earlier about where we were in the markets with energy, you know, under the Trump administration versus under the Biden administration since, since, I mean, obviously, we're down in Houston, so we're in, you know, one of the energy capitals of the world. I think it's pretty interesting to just talk about how the markets actually react sometimes to the politics versus the actual economics.
Glenn Royal:They don't always act as expected. Most of the time, we think the outcomes of politics will have an immediate impact when really it's more the broader economy and not so much the politicians. What we noted is that there's JP Morgan on their election website, which has a chart out about the periods of the Trump administration versus the Biden administration. They look at the performance of two asset classes. And we know that coming out of the presidency of Trump , pro-energy policies, reaction, and what we saw was that the S&P 500 energy index declined 40% during the Trump administration. During the Biden administration. The S&P 500 energy index has more than doubled by 211%. I c ompare that to fossil fuels. So I'm down 40% i n Trump. The stocks with favorable policies. Y eah. And t hen n ot g etting B iden a nd the stocks r ip more than double up 10%. Let's compare that to the green energy. Right?
Natalie Picha:Let's talk about the green energy.
Glenn Royal:The S&P 500, the Global Clean Energy Index was actually up 275% during the Trump administration and down 54% during the Biden administration. Yeah. It's more...
Natalie Picha:It's more about the economics than it is about the politics at this time.
Glenn Royal:And those drivers were, what we saw was happening in the oil patch . They had , you know , different economic issues. They had that , and then it ran into COVID and that's what was driving those stock prices down. Had you gone into that basing on what you thought Trump was going to do and you went long and shorter, the other, you know , you would've lost a considerable amount of wealth. Right? So, markets are different from elections are different from politics. Sweeps in government can have an impact on the markets fairly quickly. Policy changes, right? Divided governments make that harder to do. So what we're kind of seeing right now with the lay of the market is we're focused on the fundamentals, and those are strong, go back to that. I got unemployment at 4.1%, a historically low level of unemployment. I have GDP printing at 3%. That's historically high. We've been running two in the last 20 years . Below two is a kind of stagnant growth. It's that you just aren't really getting off the bubble at 2% growth. Three moves the needle in the United States. Atlanta's GDP forecast is coming in at 3.4% today on GDP, which is more of a real-time indicator. Pretty volatile, but good indicator. Right. So, against that positive economy and a fed that is lowering rates, it's a pretty good macro backup setup going into this selection. Yeah. I feel pretty good if I look at S&P 500 earnings, which is the story that drives stock prices, this inflation, and earnings, right? Inflation's under control. It's on our way back to our targeted rate. We're currently running , I think CPIs , the, the neutral rate's down about 3% right now on CPI on inflation the core PCE rate. So it's certainly quickly coming down to our rate. But that earnings growth, I'm with 27% of the company's reported in this earnings period as of today. They're coming in with a growth rate of about 4.1%. That is expected. It's next week. We're going to get the line shares this week, and next week, we're going to see about 42% of the companies reporting; next week, 19% are reporting. So by this time end of next week coming, an election earning season will largely be wrapped up. And what we expect is that earnings will beat the analyst's expectations. Once again, going into this, we had a couple of down drags. Boeing; you know, we know there are issues with Boeing right now with the strikes continuing today. Which did have a little impact on some of the earnings. If that hadn't been in there, we actually would've probably been printing higher on a beat versus expectations coming in. So earnings growth is here. I'm looking at about 10% this year. Expectations around 14% growth next year. Again, friendly Fed, that's strong. Earnings growth. Can politics mess this up? Yeah. Politics messes a lot of things up. That it would probably be a sweep and then it would take some time after that. So I don't really...I really want our investors to understand that it's the economy. And I don't want to say what James Carvel or these others say in their final phrase...It's the Economy blank...but it is about the economy. And the economy's doing okay. What surprises me is how tight the race is. Typically, you would've thought...but I also had a Biden versus Trump up until four months ago. Whatever. And now I got a Harris versus Trump. So yeah . Things are wonky in that area, but as a portfolio manager, I'm focusing on the yields that I can get right now out of the bond market. That goes a long way to meeting your spending needs in retirement. And we have very nice cash flows from bonds now.
Natalie Picha:Right. And I would say ultimately coming into this year , you know, a lot of comments and questions about, oh, it's an election year and people get so nervous around election years. And look where we are. We've had a really strong run this year. The economy's still going strong. And it looks good. So I think overall, I guess what the takeaway from this discussion is politics are politics and markets are markets.
Glenn Royal:Yeah. That's a good way of putting it. I think that's an excellent way of saying it.
Natalie Picha:Well, as always, thank you, Glenn, for joining me today and having this conversation. Oh, my goodness...this was a big one. And I hope our listeners gained a little nugget of information and knowledge because it's a pretty deep one. And would you mention again where that particular piece is? You mentioned going to the website and...
Glenn Royal:So...JP Morgan has a really good...Google JP Morgan Asset Management Election Insights. They have a very good website. It talks all about the election insights from overview. Their latest insights on the market. They talk about...and then they have an election presentation that had that one slide in there that I discussed. I really would encourage you to go there. These are good sources of information from a market perspective. They're analysts. We're not really getting the political science of this. We're just talking about earnings and interest rates.
Natalie Picha:Yeah. Just the numbers. Yeah, the numbers. Well, I'm always excited when we get together and have these conversations. Because it's always, it's always a good, deep dive into what you're thinking. Thank you for joining me today, and I am excited for our listeners to have an opportunity to hear this particular episode. So, thank you all for listening. And if you have a chance, 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 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 at our website at www.royalharborpartners.com. Whether you're beginning your financial journey now or have 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 to you.
Disclosure: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.
