In the latest installment of our occasional conversations with Fort Worth newsmakers, Kyle Hitchcock, an executive director in the J.P. Morgan Private Bank and head of investments and advice for Fort Worth, West Texas and New Mexico, talks about the current, somewhat chaotic, business climate.
The Fort Worth Private Bank manages more than $23 billion in client assets. The private bank has 65 employees in Fort Worth. Business editor Bob Francis spoke with Hitchcock about his work and how he sees current economic conditions.
This conversation has been edited for length and clarity.
Bob Francis: Tell us about yourself.
Kyle Hitchcock: I’ve been in the Fort Worth office since 2011. I’ve lived and resided in Tarrant County, but in live in Southlake, and I work here in downtown Fort Worth. I’ve been on the investment team here at the J.P. Morgan Private Bank since that time. I was recently promoted to the head of investments and advice for all of the Fort Worth and really West Texas, New Mexico region. I began my career in this business back in 2006 and spent some time at Goldman Sachs and in UBS (an investment company) in the Dallas area before coming over here to Tarrant County, Fort Worth. And I have found not only no reason to leave, but just a home here on this side of town. I absolutely love being here and building a career and, effectively, a family here on the Tarrant County side of things. We just love it.
Francis: You’ve had enough time here to certainly see changes even in that 10-year period, right?
Hitchcock: Absolutely. There is no doubt about it. There’s such a deep history to Fort Worth and yet there has been so much in the near-term that the ebbs and flows already in just the last decade. I just love this area. It’s my pace, my speed, but there’s also so much depth to things underneath the surface that I never knew before I came over here, that’s for sure.
Francis: And so what was your position previously? How did you start with JPMorgan?
Hitchcock: So when I came over to J.P. Morgan, I joined the investment desk in 2011 in the Private Bank. I had worked as an investment specialist for 10 years. So now effectively as head of investments and advice, I’m overseeing not only that same team but now the overall market, just taking a step up and over that. So I’ve been on the investment side the entire time.
France: When did you take your new position here?
Hitchcock: It became effective Aug.1
Francis: Does J.P. Morgan have a separate Fort Worth group and a separate Dallas group?
Hitchcock: So we have a Dallas office in downtown Dallas that covers really Dallas and East Texas and then up into Oklahoma. Whereas we cover all of, effectively, Tarrant County, West Texas, and over to New Mexico on our end. David Nolet runs the Private Bank office in Fort Worth. David Nolet and I are partners here in running the office here.
Francis: Let’s talk about this crazy market. I don’t know anyone who’s ever seen anything quite like this, which must make it an even bigger struggle. If it was just a regular recession, you might say, “Here’s what we do.” But this is very unusual. Here we’re seeing job growth, inflation growth, all sorts of different situations happening.
Hitchcock: To your point on this being a unique time of job growth, inflation growth, I would even say if we go back to 2009, coming out of the great financial crisis, for the most part, with a small period of rates moving up before COVID brought rates back down, we’re coming into a new normal where we’ve been in a situation where there was nowhere to go but equities, meaning there was no yield to be had on fixed income, which was a challenge for those who were aging or nearing retirement or in retirement.
Not to mention, when you look at foundation’s endowments with payout ratios of 5%+ per year, what do you do?
And in some ways coming out of that, I certainly welcome the ability to actively manage exposures to different parts of the market. So the job that we do, I think becomes even more critical. And so that’s from a high-level where we are now, but as we look at the recent equity rally, we don’t expect a deep recession ultimately right now. And the recession and inflation combined with job growth that you talked about is what we are hearing about nonstop.
Everyone is wondering and worried about what’s next. Consumer sentiment is at its lowest levels in 50 years when you look at the University of Michigan consumer sentiment. It’s actually striking when you go through, and we just did this as a bank, you go back to the 1970’s and it’s lower than any of the lowest points, which is pretty astonishing.
Francis: I did not realize it was that low.
Hitchcock: It’s not wildly below some of the lows, but the very fact that it’s below even the credit crisis, it just seems wild that that would be the case. And from my perspective, that’s simply sentiment. That doesn’t represent that risks are necessarily greater now than they were then, but it’s very telling to what consumers are feeling.
I would point to, personally, as you think through some of the data, there is no direct reflection to say, “This is what’s causing it,” because there’s a lot of theories. But we have felt food and energy prices, just as an individual, we feel that immediately. At the pump, if you will, gas prices have abated a bit and come down, but there is no getting around the fact that those two things affect your average spender very heavily and you almost have to have both. You can move in and around some of how much you consume both of those, but that’s going to be a need that you see. And so when you see that bump up the way it has, that has to have, in our opinion, had some sort of an impact on the way individuals are feeling.
But ultimately, it’s hard to know. You don’t know if you’re in a recession until after the fact. And there are multiple different definitions of a recession, because we’ve had two different quarters of GDP growth decline, which so often … And when you talk about what is technically a recession, it’s reported that you have two GDP contractions in a row and that’s a recession, but the reality is the National Bureau of Economic Research is the place that keeps the chronology of recessions, the actual defined recessions. And they have a bigger definition of it, where it really has more to do with a significant decline in economic activity across the economy which lasts more than a few months. And you look through at production, employment, real income and other indicators. And so ultimately, I don’t want to say, “Is it relevant if we’re in a technical recession or real recession?” The equity market is going to react to all these different things and only after the fact will it even matter if we were in one or not.
So, mid-June the risk sentiment was either at or near the peak negativity when it comes to the equity markets and how stock markets were trading leading up to the June Federal Reserve meeting. And around June 16 or so, after the 75 basis point rate hike, we had at least an initial bottom, assuming that we don’t go below that, and only time will truly tell if we are below that, but since then we’ve seen U.S. equity markets move up, even after the recent volatility, by 8.5%.
Some of that helped with the second quarter of the earning season. Broadly speaking, U.S. stocks came in at about a 6.2% growth rate relative to an expectation of only 4% growth.
And so all these different factors that you’re talking about are going into, as we think about equity markets, as we think about the economy, when we look at stock markets the reality is we’re buying the earnings growth of companies, and that has been resilient.
We do expect those earnings to come down a bit, but we see resiliency there and we are actually quite constructive on what that’s going to look like. But so often it comes back to what is going to happen with this inflation? It’s starting to roll over and come down, but will it continue to come down? And how hard will the Federal Reserve have to work? Will they hike us into a recession or not? And so there are a number of factors going into it, but that seems to be the one on the margin that is really driving a lot of the near-term moves up and down in the market.
Francis: Can I go back to what you were talking about about the companies’ performances in the quarter? I have seen several companies start to do, I wouldn’t say massive layoffs, but some layoffs across the board that look like they’re anticipating earnings coming in lower in the next quarter or two. Is that pretty accurate?
Hitchcock: Some of that. And that’s going to be certainly industry specific, right? Some are going to be more hurt than others depending on where they are cyclically, but we are starting to hear some murmurs of that. And some of that movement, which is very negative … I didn’t buy that. Let me be clear about my comment on that. From an economic perspective, it comes down to the question of, do we see a soft landing or a hard landing for the economy? Some of that is necessary so that we don’t see it get too hot. The question is how much more of that are we going to see, Bob? We don’t believe it will be widespread, but some of that will help with some of this wage inflation that leads to, cyclically, the overall inflation. And for some of that wage inflation to come down, we’ll need to see some of that slow down. So that is fair, to your comment.
Francis: And maybe you can go into a little detail about what you’re seeing out there.
Hitchcock: Where we saw, for the first half of the year and really in the last year, was on vehicle sales, used and new. And that was something that was extremely challenging that we’re only starting now to … It lasted much longer into this year than we expected as a bank and, I think, broadly speaking across Wall Street. I think there was an expectation that that would come down. A lot of that is supply chain issues and tied to the zip code COVID policy that we saw in China. And some of the impacts are semiconductor related.
That’s getting better. We’re finally starting to see some of the used car pricing and inflationary aspects improve. When I say “improve,” come down. And we are starting to see and feel that on the new car as well. That will be something that was typically very unique to where we’re at right now, what we’re feeling at the moment. That would be one of the areas that I would point out very specifically.
Francis: I was going to ask about supply chain issues as well, how that impacts what you’re looking at, particularly long-term, if you think that’s a long-term issue or a short-term issue?
Hitchcock: Impossible to truly say without a crystal ball how long-term it’s going to be, but we do believe through the second half of the year and into next year it should continue to improve. It’d be inappropriate for me to say, “It’s going to be better and we’re not going to have issues there,” because the reality is that may be the new normal that we’re dealing with depending on how COVID impacts things.
Francis: Yeah, one new strain of COVID could change things.
Hitchcock: That’s right. But I will say this though, it has not had a material impact. I’m stating the obvious here, that we felt in 2020 and even in 2021, but we still did see a pickup in shutdown in areas in China earlier this year. For that to continue to happen, there could be blips on the radar, but broadly speaking, we are constructive on that continuing to improve through the end of this year and into next year.
Francis: So you mentioned the strength of the equity markets before, and yet some of these fixed income areas changing. I wonder if you might talk a little bit about how does that impact how you’re working with clients and where you’re asking them to invest? And then how long do you see that happening?
Hitchcock: So with the Fed funds rate, that’s the very near-term interest rates, back off of the zero interest rate policy that has impacted some of the overall rate market as a whole, albeit it’s still relatively flat, meaning there’s a big short-term pickup in interest rates, but as you think about the 5- and 10-year numbers, as we look out there, there’s still a flatness to that.
But we are taking advantage of this to pause and be thoughtful around individual clients, Bob, because everybody’s in a different bucket. For those that have needed to find unique, reimagined ways to create the safe part of your portfolio without taking the equity risk, how do we think about providing yield? This has been an opportunity to very strategically invest in high quality bonds that will actually pay you something that is worth your time to invest.
And so we’re being very strategic about where we’re lightening up on some of the areas that have performed extremely well over the last two or three years that may not need to be as risky and doing some of the maybe boring investing, but looking at just the structural bonds that can get you 3% and 4% on average, without taking a lot of duration risk to do that. We’re also looking at some of the higher yield and preferred equity parts of the portfolio that can get more equity-like returns and investing in different areas of your portfolio that can be more diversified and do some things that should not take the same level of volatility that you do in the equity markets.
There’s an awful lot of different ways we’re doing that, but as we think about it, as I zoom out to the big picture, we’re simply focused on quality and actively managing where your market exposure is, whether it be through active management or owning passive indices to make sure you’re in the right spots, because we are not in a position now where we think full stock markets are set to rise. Being indifferent from where we are at the bottom, we do think differentiation is going to matter an awful lot.
Francis: Sounds like you guys are having to work more than before. That’s what it sounds like to me.
Hitchcock: I don’t know that I want to touch on that, because that could be a bad thing for me. I’m not bored. I’m certainly not bored.
But I think also in addition to what we’re talking about there, I’d love to talk about … The thing I haven’t mentioned is the volatility that we felt in the last two weeks again. And usually when people talk about volatility, they’re talking about when markets go down. Because markets have been volatile on the upside, too, but volatility is almost always when it goes down. And we felt that it picked back up in the last two weeks.
We expect there to be continued volatility throughout the fall and really through year end, although our long-term view on the equity markets and the economy is quite positive. But the reality is, from our perspective and I think what we’ve seen from the markets is, whether this be a soft landing for the economy or a hard landing, which comes down to the Federal Reserve, how hard are they going to need to hike rates? Is it more painful or is it one that they can land quite well, is really going to depend on how hard they hike rates through year end.
And so right now we’re seeing an S&P 500 that’s right around 4,000. I think it was above 4,000 when we started talking and just got below that today, but it’s right at that rough mark.
If I wanted to contextualize, because I’m sure you read and watch in the business news a hard landing versus soft landing, our perspective of soft landing, if inflation starts to come down, the Federal Reserve can react appropriately, we would expect to be in that 4,500-4,600 range. That’s our official Private Bank forecast for a soft landing by year end and into 2023. If there were to be a hard landing, if inflation doesn’t continue to come down and there’s a more challenging environment, which isn’t our base case, but if that were to happen, you could still see that 3,500-3,600 range on the S&P 500 by year end. That’s not our base case, but if we were to try to look at what that feels like. And so as we think about the timing, we do believe, whether it be a hard lining or soft lining, that 12 to 18 to 24 months from now we’re going to be positive.
So volatility, how do we take advantage of that? As we look at the Fed hike cycle, and we can talk more about that if that’s at all of any interest to you, but as we think about timing, the last Fed hike of any cycle when we look back at the last five times we’ve been through this, you’ve seen a sustained and positive recovery in equity markets. And so you combine that with consumer sentiment, which is at its lowest in the last 50 years, you’ve seen at these low points, one year out from the lows, very positive returns on equity markets.
And so you start to thread the needle on timing, the bottom line is if we are constructive, and we are, on earnings and equity market returns, we’re also at the point where … I’ve talked about how we’re taking advantage of fixed income rates.
We’re also for clients, and there’s still clients that are either selling their businesses or wanting to take on more risk where they have cash, we’re being very thoughtful on these dips in the market to be leaning in and owning that risk, that we want to, for the long haul.
Francis: How quickly after, say, the Fed raises interest rates, or lowers it maybe in the future, how quickly do you reach out to your clients and make changes to their portfolios? How does that work?
Hitchcock: We want to make sure we’re informing clients as often as possible. It’s always a decision. Doing nothing is making a decision. And there’s been plenty of times when we’ve paused and said, “Let’s wait.”
And so that’s a moving target. I don’t want to evade that question, but it’s a moving target and it depends on the client. For those who have stated they felt like they want to be more aggressive and take advantage of the dips, we’re obviously going to be far more active as we see that.
And we’re typically not wanting to wait just for a Fed move, Bob, to make those decisions. Hopefully if we’re doing our job right, we started positioning that late last year when it was the correct time to take some gains. Early this year, when there’s volatility, we’ve made some additional changes. And then now.
And it really depends on how we’re doing it. We’re not only thinking about “What is the Federal Reserve doing?” when it comes to inflation, what does that mean for overall view, but our view is much bigger than just rates as we think about that. We have to think about how that impacts other sectors. But structurally, if we’re doing our job right, we’re taking a 15- to 25-year view and making sure within that we’re being thoughtful on a day-to-day basis. But we are not making wholesale changes based on one near-term data point, unless it’s truly a regime shift in the way the world order is going to be.
Francis: And the Fed is pretty good about telegraphing pretty much which direction they’re going. They may not tell you the fine detail, but …
Hitchcock: You look back to Ben Bernanke and you go back to ’05 and ’06, and it’s only been since then that we have seen this level of transparency from the Federal Reserve. Prior to that, we didn’t have this level of transparency. And we still read through the minutes and you carve through it and we want to understand what is their regime change, but it’s just as meaningful. It’s always meaningful, but there isn’t this black box approach of having no idea what they’re thinking like it was not that long ago.
Francis: “Reading the Greenspan tea leaves,” I think is what I remember people talking about.
Hitchcock: That’s right. And that’s when I learned this business. I learned this business in those years when it was hard.
Francis: I wonder if I might ask about a couple of the industries that are key to Fort Worth in particular, and one of the most volatile ones is obviously energy. What do you see and how do you advise your clients to invest in a volatile market like that? You’re talking about volatility, that’s certainly one.
Hitchcock: There’s no doubt about it. And that’s always been volatile, more volatile in some ways than others. And I’ll start with the war in Ukraine. That was something we’re used to talking about now, and it’s almost hard to say this, but we didn’t see that escalating, before it started, in the way it did. But the reality is, that occurred.
And we were already expecting, at the time, what would be elevated oil prices in the ’90s or so. And we’ve gotten so used to seeing those surprises here recently that it’s almost hard to believe that that was an elevated number that we were already expecting to get to. But now with this escalation of what we’ve seen over there, we now have an extended period of time where we fully expect, when we look at the price of oil whether it be WTI or Brent, we all look at WTI in the U.S., to be in that $90-$100 range through the rest of the year and elevated above that into next year.
Our official forecast is for it to be in the mid or upper nineties, low one hundreds next year. But we’ve easily, to your point on the volatility, seeing those spikes go even higher on supply and demand concerns.
One thing I will say about oil and gas that differentiates what we’re going through now from some of the inflationary fears that I get a lot of questions from clients, “Well, is this different?” I remember in the late ’70s and in early ’80s, when people bought their first home, they looked at mortgage prices and they’re really concerned that inflation will do what it did then.
“Are rates going to move up to that level?” One key differentiator as it relates to oil is we are far more energy independent now than we were in the late ’70s and our total dependence on oil from overseas is the story is quite different.
And I think most clients and most people here in the Fort Worth area in Tarrant County understand that, I think, better than other people in the U.S. do simply because it’s such a big part of our economy. And so that’s helpful that they understand that. And so some of those fears, I think, are a little bit lower here locally than they are nationally. But I think that’s an important point because, again, it goes back to consumer sentiment and that can affect your spending patterns too. If you are afraid that inflation is going to really dry up your ability to spend, that can change some of the ways you spend and save. And certainly we see saving rates at high levels over the last two years, higher than normal, some of which is from COVID and others are from other fears.
But that’s not the only other spiel. The other story would be natural gas, which I think is important to a lot of our client businesses. And as you think about what the Barnett Shale did for this area over the last 20 years or so, that’s something that we talk about. We’re at elevated levels right now on natural gas and we would argue that, is there a bigger downside or upside risk? Really through the rest of the year, we’d say if there’s a risk, it would be to the upside in prices even from here. With, obviously, the issues that are happening in Europe, there’s only so much of natural gas that you can export. And we’re doing the most that we can right now and a bit tapped out on that demand.
So the marginal movement on demand here locally will be from weather. And we’ve had an abnormally warm summer.
So that has increased the price of coal, because so much of our power on the margin, it can be generated from coal. Natural gas has increased as well because you’ve been maximizing what you can do to put on the energy grid there. We would expect that we would have elevated natural gas pricing and our investment bank is expecting that to be north of $7 at least through year end, while coming down to a range of $4.25 to $4.75, if we had to put a number on it, through next year. So coming down, but that’s still elevated relative to where it’s been over the long haul for the last 5 to 10 years.
Bob Francis is business editor for the Fort Worth Report. Contact him at bob.francis@fortworthreport.org. At the Fort Worth Report, news decisions are made independently of our board members and financial supporters. Read more about our editorial independence policy here.
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