Episode #13 of Intentional Wealth:
Investment Strategies with Brian Mulberry

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Welcome to Intentional Wealth, a monthly podcast where, alongside notable financial professional guests, Private Wealth Advisor and Founder of Braun-Bostich & Associates, Amy Braun-Bostich, delivers useful insights and strategies that help YOU live your best financial life! Remember, when your goals are meaningful and your wealth has purpose, you can truly live with intention.

Now here's the host of Intentional Wealth, Amy Braun-Bostich.

Amy Braun-Bostich: Welcome back, listeners, to another episode of Intentional wealth. My guest today is Brian Mulberry from Zacks Investment Management, where Brian is a director and client portfolio manager. Brian has collected over 25 years’ experience guiding individuals towards retirement and protecting against any economic backdrop. He holds a series 66, series 65, and series 63 licenses, which qualify him as both a securities agent and investment advisor representative. Brian also works closely with the investment research team at Zacks, delivering insights on key macroeconomic trends, including interest rates, inflation, and economic growth indicators. He holds an extensive understanding of portfolio construction using mutual funds, exchange traded funds, separately managed accounts, annuities and listed private equity along with retirement plans in the defined contribution investment only space.

With that, I welcome Brian Mulberry to join me today in discussing an array of topics such as the economy, markets, allocating assets, the future of inflation, and now bonds. So happy to have you with us here, Brian, thank you for joining me.

Brian Mulberry: Amy, thank you so much. It's a pleasure to be here. We certainly appreciate the opportunity.

Amy Braun-Bostich: Great. We just spoke a little bit about your title at Zacks, but how did you really get started at Zacks?

Brian Mulberry: Well, I've been in the business for 25 years now, and a dear friend of mine had been with the firm for quite some time, and he'd been bugging me about this firm, and they're definitely still a family owned, boutique size manager. But as he started to bug me more and more, when I looked into the products and just how they go about their business, one thing was undeniable, and that's the incredible consistency of how Zacks goes about allocating into their strategies and the process that they use. And so now I've been with the firm for coming up on eight years, and it's just been great. Every time we have these types of conversations, we have a lot to add because we can quantify through our process what we think really is in favor at this point in time, and we have a good mathematical background. As to proving what that valuation is and why it might be important to your portfolio at this moment in time.

Amy Braun-Bostich: Yes, I'm certainly impressed with the portfolios that Zacks recommends. It's been really great today the Fed had decided to keep interest rates the same. What is your take on that?

Brian Mulberry: So, our take on rates not changing today was really more about what came out of the voting members and what they see happening in the forecast a year from now. And things that we wanted to really kind of make note of is the fact that they are seeing a stronger than expected economy. And typically, that would mean that markets should be moving higher. If GDP is going up, if retail sales are going up. Those are all typically good things. But what is happening is good news is bad for markets today because it means interest rates are likely to stay higher for longer than equity traders have currently priced in. And what that means in terms of quantifying the value of an individual company is the longer rates stay higher, the more of a negative impact it has on the value of future earnings, because we know that the cost of capital has a direct impact on profitability. So, if rates stay above neutral or restrictive for a long period of time, it will have a negative impact on what earnings structures look like for the market going forward. And that's why we're seeing the market kind of trade on a little bit lower level. After the press release noting that no change in rates, but a big change in what expected rates will be twelve months from now, they went from basically 4.6 to remaining at 5.1. So, what we're seeing is a restrictive interest rate above 5% for at least the next twelve months.

And the market had really been discounting those rates heavily, saying, we expect rates to be cut for the first time in June and by the end of 2024 end up around that 4.6 number. And now we've seen that obviously the Fed come out and say, no, that's just not likely to happen. Maybe only one or two rate cuts late next year. And that's really what's moving the markets right now and what the impact is directly on those valuations.

Amy Braun-Bostich: I've heard some people talk about these higher rates creating a recession in 2024. How likely do you think that is to happen?

Brian Mulberry: That's a great question. In our view, what's most likely to happen would be more akin to an earnings recession, where we see a couple of quarters of negative earnings from an index like the S and P 500. But there's still enough strength in the underlying labor market where we have enough people working and wages are now in positive territory in terms of wage growth. There might be enough spending going through the economy to keep that GDP number above zero. It might be treading water; it might have more of a stag-factionary type of feel to it. But it could be one of those things where we see earnings decline for a couple of quarters, but we don't necessarily experience the other traditional hallmarks of a recession, which would be negative GDP for those same two quarters.  

Amy Braun-Bostich: Gotcha. A lot of people are saying the economy is terrible. I hear that all the time. But I'm not seeing any evidence of a terrible economy. And you've just stated that the Fed isn't either. So why do you think people feel that the economy is so bad?

Brian Mulberry: That's a great question. Amy and I travel the country for Zacks in my capacity, and everywhere I've gone for the last year and a half, airplanes are full, hotels are full, restaurants are full. And so, I have the same reaction. I look around and say, what know? And I think part of it is an individual experience. When you're answering a survey, what we know that we can quantify in the economy is that if you owned a home before the pandemic, when interest rates went to zero, you had a once in a generation opportunity to refinance what is likely your biggest debt, your mortgage, on your largest asset, which is your home, and you could do it at two and a half to 3%. And a lot of people did that.

They refinanced their homes, they took equity out of that rising asset, they made improvements, they bought cars, they paid off student loans, they paid off credit cards. So, for those people who owned their home, they're in a substantially different personal balance sheet position than they were before the pandemic. Unfortunately, if you didn't own your home, you didn't have that opportunity. And the real likelihood is that your rent from 2020 till now is up somewhere between 15 and 20%. And so, depending on who you talk to, they might have a very individual response about their personal situation. And that's one of the main driving factors.

If I could refinance my mortgage at two and a half percent, pay off everything, even with the cost of goods, CPI and PCE measures going up substantially, it's still not bothering me because I'm light years ahead in my personal balance sheet and what my cash flow looks like on a monthly basis, because I'm not spending it on my interest on my mortgage. And so, we think there's a real reason why there's such durability when it comes to consumer spending right now. Some of these people just aren't feeling the pinch in the same way. Now. The other part of it is, it's a very regional experience. We know that employment and things like rent look very differently depending on where you are. And that goes down to even real estate prices. Right. If you're in Seattle, Chicago, or San Francisco, that's where we see a lot of pressure on things like commercial real estate valuations and that kind of stuff. But if you're in Nashville or Austin or Miami, it's a completely different subject. We see rents up, but occupancy is up as well. And so, it really is coming down to a very regional experience and a very personal answer as to how do I feel about things going right now in this economy.

Amy Braun-Bostich: Gotcha. Now, there's two strikes going on right now, the Screenwriters Guild and the UAW. Do you think they'll have much of an impact on the economy?

Brian Mulberry: Well, in the UAW, they've been extremely specific about what it is that they're looking for. They want a reduction in hours worked from 40 to 32 and a pay increase of 40%. That in and of itself will be inflationary because what you're saying is productivity is going to go down by a quarter, but the cost of labor is going to go up 40%. All of that is going to get passed along to the consumer in the form of higher unit prices when you go to buy a new car. So, what we know is those automotive factors play directly into the core calculation of either CPI or PCE, whatever your preferred method of measuring price increases is. And so, in the immediate term, you'll have a big jump for almost half a million workers in terms of a giant pay increase.

But then also downstream, you'll have unit costs going up. And so overall, again, coming back into the interest rate conversation, it relates to more upward pressure on wages and prices. And that means that somebody like Chairman Powell is going to have to keep the pressure on in terms of having a restrictive interest rate posture for a longer period of time.

Amy Braun-Bostich: That's interesting. So, you feel like if they get their way, it's going to be inflationary for the economy, I think to sum up what you said.

Brian Mulberry: Yes, that's correct. And it's not a judgment on who's right or who's wrong. That's not what we're trying to say. It's just simply reacting to what happens if these demands are met. And ultimately, we know that it's the consumer that will bear the cost of any price increases, including the cost of labor, at that point in time. And that also includes, on the back end for the writers Guild and the actors, anything that would have to do with the production of that type of content. Again, if the costs increase, that will simply get passed downstream. Whether you're looking at traditional cable rates or streaming rates, all of that will have to be paid for or financed in some way down the road. And it doesn't mean it's going to get cheaper. In our view, it just simply makes things more expensive. And that, by definition, is inflationary.

Amy Braun-Bostich: That's very true. How do you manage this market? How are you recommending, in a general sense, that people allocate their assets?

Brian Mulberry: Yeah, it's a great question. So, we feel like the market season is changing. And what I mean by that is, over the last 15 years, since the global financial crisis, we've been in a regime where interest rates have been relatively low. And then some people might even make the comment of drastically lower than the neutral rate should have been during that period of time. But then also we had the new wrinkle of quantitative easing, as well as direct stimulus involved over Covid. And what that has meant is cheap and easy money is great for growth. And we got to a point where the S and P 500 was returning somewhere around 15% per year every year. And people wake up in January and they say, where's my 15% return?

We're saying, look, if the rate environment is changing, that means the seasons are changing for how the structure of returns are going to look from this market. And so, if we're going to have higher interest rates and less available capital, it's going to mean that you're going to want to be more selective in what you own and why you own it. In the short term, allocating in this market is going to be difficult because we expect a lot of volatility. The dislocation between equity expectations on interest rates versus bond expectations on interest rates alone could cause the market to move 10% to 15% lower fairly quickly.

So, what we're seeing is, from what we can quantify through our process of looking at stock earnings estimate revisions as much as two years into the future, what we're seeing is basically no real progress in earnings for the next couple of quarters. Now, things do start to pick up towards the second and third quarter of next year, and we do see a materially positive year by the end of 2024. And that coincides with prices coming down and some interest rate relief. Like the Fed said today, one to two interest rate cuts. But between now and then, over the next two to three quarters, quality is going to matter. And really having a clear definition of what quality means to you is going to matter even more.

And so, for us, what we're looking for are those businesses that have low debt to cash ratios, that have good and growing earnings structures that are maintaining their profitability in the face of things like rising labor costs and rising unit costs. But they're able to actually invest in their own future growth organically so they don't have to over leverage their balance sheet or borrow too much. Those companies, in terms of their stock prices and the valuation, they should outperform their peers. And so having a good idea of what that means to you and your portfolio is going to help you allocate outside of that into any other alternative basket that you might be looking at as well.

Amy Braun-Bostich: So, would that be more of a play on value stocks then than growth stocks?

Brian Mulberry: It would. We've had this conversation a lot this year because growth, just in pure style box format, has outperformed value. But that's on the back of a very narrow market. Seven stocks account for around 85% of that growth return. If we take those magnificent seven stocks out, what we see is value actually is still slightly ahead of growth at this moment in time. And so, we think that there's a little bit of anomaly there in that, so few names have driven one style box so much higher, and that has brought with it things like the SP 500 and even the Dow and having a relatively good year on the heels of what happened last year.

But we still aren't out of the woods, and a lot of that is driven by the cost of capital is going to be more expensive than most traders had thought going into this morning. So, as we come out this afternoon now, those types of factors become very important to how you allocate new money if you're investing right now.

Amy Braun-Bostich: Got you. Do you have any thoughts on bonds? Because that's been really tricky.

Brian Mulberry: It is tricky. And one of the most complicated things is also one of the most simple to understand, and that is I can sit in cash and get 5%. So why would I risk any capital at all in some type of fluctuation in valuation when things might be getting a little bit strange when it comes to credit rating again, as stress of higher interest rates starts to trickle through some of the sectors in this economy? And so that's one of the biggest headwinds, is that my risk free rate of return right now is substantially higher than where it was a year ago. And so bond traders right now are having a hard time getting people out of a money market account because of what they might have to offer.

Now, we know the core interest rate is in a range at 5.25 to five and a half. But that doesn't necessarily mean that corporate bond rates are double that. But it's likely that's what it would take to draw a huge chunk of cash off the sidelines. And I don't know of anybody who's interested in trying to finance bonds at 10% yield right now. And so, there's a very interesting kind of air pocket right now. That doesn't mean that all bonds are bad. That's not what I'm saying. What I am saying is be very selective about what it is that you're looking into and know what you own and know why you own it.

Amy Braun-Bostich: Got you. And even tax freeze, right? That's been sort of a quandary, is that supply is not extensive, but tax freezes really have done mediocre.

Brian Mulberry: Yeah, and that's kind of interesting because there's an argument to be made that a lot of states and municipalities are actually better capitalized than some publicly traded companies at this point in time. And so given the tax-free return of some of those structures, at least in the short term, for the next two to three years, there's definitely some really good opportunities that are available. And so, I would agree with you, it's a bit of a quandary as to why they haven't performed better. But if you were going to press me back into a corner, I would definitely favor more highly rated municipals, than I would highly rated corporates, at this point in time.

Amy Braun-Bostich: Oh, that's interesting. That's good to know. So, is there anything new that individuals should look out for or prepare for? What are your feelings on that?

Brian Mulberry: Again, it's such an individual question, and where you are at this point in time is going to dictate what your choices look like down the road. What we expect is, again, more volatility between now and the end of the year. But that said, it wouldn't surprise us terribly if the SP ended up more or less where it is right now at around 4400 this afternoon. And it just means a lot of bumpiness along the way. There is a case to be made, like I said, for about a 10% drawback, but it could come back by the end of the year. And so, again, if you're looking at a short-term investment horizon, be very picky and choose your timing very carefully.

But if you're a long-term investor like us at Zacks, there's a lot of good valuations out there right now that you can certainly take advantage of in this period of time where there's some indecisiveness from those short term traders. And so, it really just kind of depends on what your perspective is and how long you intend to be invested. But we always believe that there's a reason to have exposure to these types of assets. And we understand right now 5% in cash is a really attractive thing, but there's always a way to have diversification that might outperform that save money as well. And so, we just would encourage people to continue to do their homework. And again, active management right now is probably going to outperform passive management for all the reasons that we've just talked about.

Amy Braun-Bostich: Right. Well, is there anything I haven't asked you that you think I should ask you?

Brian Mulberry: No. I think we've covered a whole lot of current events here today. Again, we certainly appreciate the opportunity to be here and connect with you and certainly happy to be back anytime you need.

Amy Braun-Bostich: Oh, that's fantastic. A lot of great information was shared today, and I also think we covered a lot. And I want to thank you so much for taking the time to talk with me today, and your insights are greatly appreciated. And I bet this has been really informative for our listeners. So, thank you again.

Brian Mulberry: My pleasure.