Making Sense: February Q&A

Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. On Tuesday, February 13th, 2024, our Director of Market and Economic Research, Phil Neuhart, sat down with Penn Nugent, Director of Personal Portfolio Strategy, to talk through some of the concerns our clients are having.

As a reminder, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only.

Phil: Penn, thank you so much for being here today. Why don't you take a moment and remind the audience what you and your team do on a day-to-day basis?

Penn: Thanks for having me, Phil. I lead a team of portfolio strategists who are in-market providers of financial advice in our wealth management group. And as a result of that, we get to hear from clients every day about what they're concerned about and what they're thinking about it as it relates to investments.

Phil: So in terms of what are you hearing from clients—we have a stock market, the S&P 500 has broken above 5,000. We're near all-time highs. We've had this incredible rise since October 2022. So it would seem that clients would feel pretty positive in terms of where we are. I sometimes get a different sense. What are you hearing, and your team hearing, from clients in terms of sentiment?

Penn: Because we have clients across the nation, we actually hear from two different viewpoints. One is the viewpoint where clients are really focused on the long term, and these types of things really aren't interacting with their thought process around how to be in the market or out of the market. And how risk impacts them on a day-to-day basis isn't really relevant.

But the other group really is focused on—it's on the shorter-term time horizon. They are—most likely been more conservative over the last 18 or 24 months. Maybe they're doing cash or cash equivalents, and they're really trying to look for that opportunity to get back in the market. And with these recent highs, that has really kind of put a warning sign to them again, yet maybe thinking that the market might be overvalued or that they may need to wait until that next "pullback"—and that's difficult. It's a challenge.

Phil: For those clients, what are they worried about? What are things they're watching?

Penn: It's everything. It's geopolitical. It's—we've got a election this year. It's inflation. You know, kind of, we're going to talk about that. And so they look to find items that would validate why they shouldn't be investing, and unfortunately, historically, as you know—stay with the fundamentals and over time, we do get returns.

Phil: Yeah. You know, I'm on the road as well, hear a lot of questions regarding the election. Election years are interesting, right? Generally markets are up during election years. They tend to be up more in a re-election year than when you have two brand new candidates, but there's also a lot of noise in that data.

One, elections only happen every 4 years, right? So a small sample size no matter how you look at it. Also, other things happen in elections that are not necessarily because it's an election year. The year 2000—election year—you had the beginning of the end of the tech bubble. 2008, you had a Great Financial Crisis, which was many years in the making. 2020, you had a global pandemic. These were all election years. So looking back and say, "Well, there's a playbook for election years." I'm a little skeptical of that.

Penn: Yeah, I think we do a good job of reminding our clients about the fundamentals, and you take something like this year where you say, "Okay, well, it looks pretty obvious. We're going to pick from one of two candidates." But we're actually hearing from a lot of people saying, "Well, what if there's a third?" Right? And so that's just another example of the unknowns and the reasons that we have to keep people aligned with—"What is my financial plan? What is my long-term strategic allocation? And how am I doing as I compare to that?" That's the measuring stick.

Phil: Absolutely. And so let's talk about some of those fundamentals, less geopolitical-election-type things. One big topic, of course, is in inflation. We recently received some fresh inflation data that surprised to the upside, and markets at least initially moved pretty sharply. Interest rates yields up, stocks down. Why is the market so obsessed with inflation? Well, it's about the Fed, right?

We've been somewhat skeptical that the Federal Reserve would be cutting the overnight rate in March, and Chairman Powell basically squashed the idea of a March rate cut in his recent press conference. Now you are seeing futures reduce the number of cuts this year, but still, you know, they're pricing something like four cuts. We think three or four cuts this year. So most likely short-term interest rates decline at some point this year—might be later than many had hoped, but at some point. What are you hearing from clients? And what are you saying to clients in terms of that change from where we've been over the last few quarters?

Penn: Yeah. I think what we're hearing from clients is just a question about when, right? Timing. And we've continued to be, I think, pretty on about it's coming, but we haven't been yelling like "It's happening right now." So that's been good. We've got a little bit of time.

But when you think about what the time means is "Hey, if I'm in cash or if I'm in a short duration bond portfolio, I need to think about what I'm going to do with that money. Am I going to extend duration, grab some of this yield, and make sure that I have it going forward? Or am I going to maybe take my cash, invest in a multi-asset portfolio, or pay off debt or do something?"

These are things that we're trying to talk to clients about and really trying to have advice that you should do something. Sitting and not doing anything will most likely be something that you look back on and say, "I wish I would have done something." Maybe as early as the end of this year.

Phil: Right. You mentioned multi-asset portfolios. One major shift the last couple years is finally there's some yield in fixed income.

Penn: Yeah.

Phil: So when you think about diversified portfolio, there's this asset that just had no return or yield—it had return—really no yield. Suddenly, there is potential for yield. What have you seen in that landscape in terms of multi-asset portfolios?

Penn: Yeah, our clients are really benefiting now by having fixed income be able to be a driver, right? Before you might have had to have a difficult conversation to say, "Hey, you've got a goal that's either going to require you to take more risk because we really need the return-generating parts of our portfolio to really add that value because we weren't getting it in the fixed-income space."

And now that dynamic has changed. And so our strategic allocations are really easily aligned with people's plans. We're able to get a nice yield in the fixed-income space, and we expect that to be for some time to come. So the reality is yields—although have had some negative impacts on other parts of our lives—the reality is for investments our portfolios are able to generate quite a nice balance now between the fixed-income and the equity outlook.

Phil: Penn, thank you so much for being with us today. This was really informative. Thank you so much for your time.

Penn: Thanks for having me.

Amy: Thanks for watching. We hope you found this information helpful. If you have a specific question about your financial plan, please reach out to your First Citizens partner or visit FirstCitizens.com/Wealth.

Making Sense Outro Slide

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