Episode 120 - Marks on the Markets | Recession or No Recession?
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Once a month, we take a look back at what God is doing in the world of Faith Driven Investing and the global markets. We also spend time looking at current trends and outlooks with great interest and discernment in hopes to identify God’s redemptive work in the world. Bob Doll, Chief Investment Officer at Crossmark Global, and David Spika, who leads the GuideStone Investments Line of Business, have both served as guests and contributors to media outlets such as CNBC, Bloomberg TV, Moneywise, and Fox Business News. They join us for a look at market activity from July 2022. This is Marks on the Markets.
All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies and securities discussed. This podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization.
Episode Transcript
Transcription is done by an AI software. While technology is an incredible tool to automate this process, there will be misspellings and typos that might accompany it. Please keep that in mind as you work through it.
John Coleman: Welcome to the Faith Driven Investor podcast. This is our monthly Mark's on the Market podcast, where we hear from experts around the world who are leading faith driven investment firms, who are people of faith and who are intimately familiar with the operations of markets, and can help us to understand what's going on day to day in the financial markets around the world. Today, we're really privileged to welcome two legends in the space. David Spika is the CEO of GuideStone, the largest faith driven investment mutual fund manager in the world. And Bob Dole is the CEO of Cross Smart Global Investments. Faith Aligned Institutional Investor. And both of these gentlemen also have long and storied careers in the investment industry. Hopefully most of you have heard from them before and they offer a great perspective on markets. And we're just so pleased to have the two of you with us today. So thank you, Bob and David, for joining.
David Spika: Happy to be here.
John Coleman: So we're going to kick off. It's been a busy week. It's been a busy month and it's been a very active month in financial markets. To start off, Bob, I wanted to talk to you. We actually just had the GDP numbers come out today as we're recording. And the question I have for you is, are we in recession? Which used to be a simpler question maybe to ask. But we've heard recently from Janet Yellen in the White House that maybe two negative quarters of GDP wasn't actually a recession. So in this context, how are you thinking about recession and are we in a recession right now?
Bob Dole: You make a great point. That is, we're not sure about the future, but we're going to argue about the past. I think the headlines have just started. Many will say two down quarters in a row. Well, that's a recession. Other people say not so fast. The truth is, the National Bureau of Economic Research declares when we have a recession, typically months after the fact. So there is nothing magic about two down quarters. Although I went back in my history books and found out the last time we had two back to back down quarters and there was no recession was 1947. So it's been a long time. So typically when you get a couple of down quarters, you know, somewhere in that zone there's a recession. So my view is that the weakness we saw in first and second quarter were the most volatile parts of GDP. First quarter it was trade, second quarter it was inventories. And the more traditional, possibly more stable parts of GDP were okay down in the first quarter from the record. GDP we saw last year is strongest since 1984 and of course even slower in the second quarter. My guess is forget the numbers and recession or not, we will continue to slow. That was in place already after the strong year last year, aggravated now by inflation, interest rates and attempts to quell growth, if you will. Let me add one more point. The reason I think we may escape a recession or if we have it, is just going to be short and shallow is the strength of the things that make up our economy, the US consumer not perfect and weakening for sure, but still has lots of excess savings on the balance sheet as a result of COVID either money not spent or money nailed by the government. Secondly, the corporate sector. Cash. Cash flow. Balance sheet strength. All pretty good. Not uniform, but pretty good. Profit margins are still high, albeit under a little bit of pressure. And then most importantly, the job market, we still have twice as many job openings as we have people looking for jobs. That's a very strong job market. We've never had a recession in the US before with a strong job market. Now it's beginning to weaken. We'll see where it goes from here. So weakening for sure. Recession. You tell me what the definition is.
David Spika: Can I? If I could jump in. I think we're asking the wrong question. I don't think the question is, are we in recession or not? I think the question is how are consumers faring? Consumer spending is 70% of our GDP and consumers are hurting today. No question about it. Just look at Wal-Mart's results from this week. That really is the key. And if we're not in recession today, we fully believe we will be, because the Fed is going to have to continue to be very aggressive in raising rates and letting the balance sheet run off in order to bring inflation down. We've never seen inflation come down meaningfully without a recession, and we've never seen inflation come down meaningfully if we didn't have a real positive Fed funds rate. And we've got a long way to go before we get there.
John Coleman: I want to circle back to the inflation question, but before we dig there, assuming we are entering, Bob, as you said, a slow down or David, as you said, there's a recession on the horizon. How are the two of you thinking about which economic sectors or asset classes are likely to perform well in that type of environment? And how are you thinking about those that you're trying to avoid as we enter those two potential situations?
David Spika: I think it is becoming a good opportunity to buy bonds, particularly high quality bonds and treasuries. Obviously, the first half of the year was absolutely horrible for bonds, one of the worst periods you ever seen for the Barclays AG. But with rates where they are and starting to go lower, they will continue to go lower as we move into recession. We're going to have credit spreads widen. But if you own high quality bonds and if you own treasuries, you should be okay. We're also going to see at some point an opportunity to see risk in the equity market. We don't think that time is here yet, but at some point we don't get these times very often. Very rarely do we get a chance to buy stocks 20, 30, 40% down. We're going to have a chance to do that. But today, bonds and even cash, cash is yielding better than two and a half percent. What the heck? Let's put some money in cash. Let's increase our cash holdings, have some dry powder. So when that opportunity to re-risk comes, we'll be ready. And on the bad side, I would be very leery of non-U.S. exposure, particularly risk exposure, whether that's emerging market debt or equities, because the dollar's likely to continue to remain high. That's the flight to safety that we see in a volatile environment. And as long as the dollar remains high, you probably want to stick with U.S. assets. And the other thing I would be a little leery of is commodities. Obviously, energy has been great, but commodities are very economically sensitive. We're seeing oil prices come down. Copper is down about 25% from its high. We need to be leery of those as long as we believe we're going into a recession.
John Coleman: Bob. Anything you'd add to that?
Bob Dole: Yeah, largely in agreement. I'll go in the same order. And our fixed income funds, we have length and duration. We're still below our benchmark, having been way below our benchmark at the start of the year. So while we're down for our clients, we're down not nearly as much as the benchmarks. We think, as it sounds like David does that. At worst, we're in a trading range for, let's say, the ten year yield. It's 280 ish as we speak. Could we move down that to 70 to 60? Sure. Could we move back to three? Possible. But the threat, the big negative sign in front of the bond mark is probably removed as the economy slows and we see less bad news on inflation, on equities. You know, the question is, was June 16 the low? It is the fifth close trading where we got a big bounce afterwards since the bear market started. I think we saw off that bottom the best news so far. But I still think we've not seen the capitulation that is typically as a bear market. I'm talking about, you know, volatility up the VIX over 40. A big explosion in put to call volume. We've not seen that a pick up in volume generally kind of, if I might, puking it out. We just haven't seen that yet. So we probably have a lower low, but we are opportunistically and only on weakness beginning to accumulate some stocks, commodities. I agree. They had a huge run. Oil's down. Copper is down for among the reasons we think inflation's going to get less bad, if you will. And I guess maybe the only area I might put up a little difference is international. International stocks beat the U.S. by 300 basis points in the first half of the year. Very surprising to a lot of people. Despite the dollar's strength, we expect there might be more of that to come. Non-U.S. markets are a whole lot cheaper than the U.S., although value never gives you a timing tool. And if the economy is weak, this flight to safety and the more defensive nature of the U.S. market could help us do better. So I think the jury's out on that one. My guess is there'll be some good stocks in both geographies and some bad ones in both, too.
John Coleman: And maybe before we move on just to zero in those, have you mentioned that there might be further room to the downside in U.S. equity markets? I think, David, you said you're not ready to kind of start buying aggressively yet. Bob, you said something similar. I believe on our side we've been thinking the same thing. We've seen a lot of multiple compression back to more historical averages, but haven't seen the weaknesses in earnings materialize, which could provide further downside if you have thoughts on it. We'd love to know. Maybe starting with you, David, just how much further are you looking for stocks to decline before you think it's a buying opportunity? Is it 5% or 10% or more? And what would be your sign that we might be hitting the bottom of that trough and that it might be an opportunity to begin getting in more aggressively?
David Spika: Great question and several ways to look at that. We're trading at about 18 times forward earnings today. Markets have historically bottomed at 11 times. Do I think we're getting to 11? I sure hope not, because that's a long way from here. But you hit it on the head. We haven't seen earnings degradation yet. And if we're going into recession, earnings are going to come down. So we need to start seeing earnings estimates go lower. Historically, in a recession, earnings fall by 30%. That will be the next leg down and that will create additional multiple compression. That 18 times is still not where we should be if we're going into recession. So those two combined are likely to take us down further. The average decline for a bear market when going into a recession is 36%. So it wouldn't surprise me to see us broach that 30% level. We're down about 14 or 15 now. We did hit the 20 mark, so 30% would not surprise me in terms of when the bottom is in. As Bob referenced, there are certain signs, technical signs, 90% of the market trading above its 50 day moving average is one of those. But one of the things that we think will be a pretty clear signal is when the Fed has ceased raising rates. Now we're not on board with the Fed cutting rates in the first quarter of 23, but if the Fed's pausing, that means we're likely at an inflation level that is somewhat palatable and the market will respond well to that. Now, that doesn't mean we're back off to the races, but it does mean that major headwind, which is rising interest rates, tightening financial conditions, is probably in the rearview mirror.
John Coleman: That's excellent.
Bob Dole: Again, not a whole lot of agreement, maybe a little less bearish than that. I give it one in four, one in three that the June 16th low was the low. So the majority case by far is it wasn't. And I have said that absent a significant recession, the risk is probably a 5% move below where we were then and we're up ten since then. So that's 15% from here. Kind of what we're down from the high not too far from that. We've narrowed that gap. So I was saying the lion's share of the bear market from a price standpoint is in the rearview mirror with this nice rally we've seen. Perhaps not now if we're going to have a more significant recession with imbalances that we don't see today, it could either be worse and or last longer. And I agree with David with those technical signs. Fundamentally, we'd like to see that we've had a peak in long term interest rates. Perhaps that's in we'd like to see the end of earnings estimate cuts. We're not there yet. We've only started. And I'd say the Fed thinks slightly differently, visibility on when the end of Fed tightening is likely, and I don't think we're anywhere near that yet.
John Coleman: I want to pick back up now on the topic of inflation. We've talked about it throughout here and obviously it's high on people's minds. There was recently a stop inflation bill. I think it's come out in Congress, for example, or titled that, you know, as we think about this, inflation is obviously a policy issue as well as an economic issue. And I'm wondering if you could talk about what you're looking to see from the Federal Reserve as well as from the US government as we seek to tame inflation and how you see that inflationary environment developing now. And perhaps, Bob, if you don't mind, we could start with you.
Bob Dole: Sure. Be happy to. So, first of all, a little bit history. Put it in context. It seems like inflation was a topic we didn't talk about forever because inflation was two or lower for years. And then all of a sudden, you know, we wake up and inflation's, you know, eight, nine, approaching 10% because remember, inflation is transitory. That's a joke, obviously. And we move on from there. Look, we have said since the first of the year, we think second quarter will register the peak in inflation. And I think that's the case. Obviously, a couple of weeks ago, we got that June inflation number that was just so devastating after the negative surprise in the month before. So, you know, we're at some levels that are reasonably high reasons. We think that we're likely to have lower inflation in the next bunch of months. One, the slow down the economy. Two, as both of us have already commented, declining commodity prices, oil from peak to trough down more than $25, copper down 25%. Dr. Copper tells us a lot about both the economy and inflation. And then three, the supply chain problems. I'm not making the case for solving them, but I think they're a little less severe and will be as we go forward than where we've been. All that takes the inflation rate down some. My guess and that's all these things your hope, their educated guesses is by the end of the year, we'll be registering monthly inflation numbers that annualized around four or 5%, down from your 8 to 10 where we speak. And that's a problem because the Fed says they want too I think they'll compromise at some point at three, but 4 to 5 is not two or three, which means there's more work to do. And I think that could create problems for stocks and bonds somewhere down the line. Maybe not until next year.
David Spika: Yeah, I would agree with Bob that we've probably seen the peak a sure hope we don't go above 9.1%, but I'm not quite as optimistic on the decline. You have to consider what the Fed is able to do to mitigate inflation. They have no control over the supply chain issue. The only thing they can have an impact on is demand, and they've got to take the consumer out at the knees. How do they do that? By reducing consumer wealth. We've already seen that financial assets, housing next and they have to reduce consumer incomes. We've got 3.6% unemployment today. Consumer real incomes are not good, but obviously nominal income is very good. Second quarter nominal GDP was over 9%. That's too high. So the Fed is going to have to continue to raise rates until we start to see some weakness in the job market to really have an impact on consumer demand to materially bring down inflation. And we think that's going to take a while. We think that could be another 12 months. The belief that the Fed is going to be cutting rates in the first quarter of next year, which is really why the market was up yesterday. And today they perceived Powell's comments as dovish, which I don't get. We just don't think that's likely at all. And if inflation's running at four or five, as Bob says, if it's running at six or seven, regardless, the Fed's not cutting rates there. They may pause, but they're not going to be cutting rates. And as long as they're not raising rates, they're not doing the damage to consumer spending and consumer incomes that they need to do in order to bring inflation down. So to us, it's a longer cycle that we're facing.
John Coleman: Just to pick up on a couple of those themes, because you touched on really interesting things there. One is just very simply, where do you see interest rates going over the next 12 to 18 months? Obviously, the Fed funds rate, but also how those filter out into the economy. What's your outlook for the interest rate environment over the course of the next year, year and a half? And maybe, Bob, if you don't mind, we'll start with you.
Bob Dole: Sure. So let's start with the Fed press conference yesterday. Chairman Powell, you know, if you read between his lines, he's basically suggesting there's 100 basis points to go. They have the luxury of no meeting for a couple of months here. And, you know, 100 basis points probably means 115 and 225. Reading between the lines, what David said, I think both of us believe that's not the end. That's just not going to do the trick. So I suspect the market reacting to all that positively yesterday and today probably get smacked across the face again at some point when people realize that's just not going to do the trick. So I think the Fed's got more to go. It's going to take longer. I didn't say it when I comment on inflation. I should have. David said it. Well, you know, the Fed has little control over inflation because they only can influence the demand side. That's why the commodity price thing the of solving some of the supply chain problems is so key. If inflation is going to come down regardless almost of what the Fed does out the curve, I think that for now interest rates have found a level we got to that 349 intraday. A few weeks ago. I don't think we'll see that level any time real soon. But if I'm right, 4 to 5% end of the year, if David thinks six or seven, even more about what I'm going to say will come true, interest rates will head back up. It's just not enough to have these big negative real rates in order to have an impact. David said this earlier Getting real rates to be positive is almost always required to tame the inflation. So I would expect they will have out the curve higher rates again starting, you know, months from now, but enough to be painful.
John Coleman: So, David, as you pick up on that question, I'll raise a potentially frightening question, which is, you know, in some ways, this economic era looks a lot like the late 1970s, right, in terms of the rapid inflation, in terms of action in commodity markets, etc.. I know there are differences, but at that time, interest rates climbed to a truly phenomenal level. I think at some point we're at 20% or something like that in the late seventies, early eighties. Do you see any risk of that type of interest rate movement? And if not, what do you think moderates this era versus that one?
David Spika: Yeah, I was in high school then, so fortunately I didn't feel it as much as maybe my parents did. But my first mortgage was nine and a half percent and I recall being lucky that I got that. But in any event, I don't think we get to that point. The economy, the global economy is much different today than it was then. The Arab oil embargo was a big component there. We weren't producing the energy we produce today. We didn't have the global trade then that we have today. And the Fed was, I think once Volcker took control, he really had to work hard because they were so far behind the curve. Now, this Fed's behind the curve, too, but I don't feel like it's the same situation. All that said, one of the things that does concern me and I mentioned globalization, one of the things that is a likely byproduct of the war in Ukraine is the fact that countries around the world, economies around the world don't want to be dependent on other nations for their needs, for their products, services. Look what's happening in Germany right now. They're in a world of hurt, given what the Russians are doing with regard to natural gas distribution. And so that reduction of outsourcing that becomes on sourcing, right? In-Sourcing producing more goods at home is going to create some structural inflation that we're not used to. Now, that doesn't mean we get double digit rates. I think the economy would react much more quickly today than it did then to a significant rate hikes. And again, we're starting from much lower level today than we were there. I can't remember where we started then, but we weren't at zero. So on an absolute basis it's not going to have to go as high. But there are some similarities between then and now that do give me a little pause. And it's that globalization feature that has been a real positive for inflation over the past 20 years. That may be coming to somewhat of an end at this point.
Bob Dole: Yeah, the three reasons in my view that we had such low inflation for so long were technology, demographics and the issue of globalization. Globalization, as David has said, is disappearing. The nationalism around the world and lots of politics is causing that not to be the negative inflation pro growth thing it was before population. The all the developed world has dangerously low population growth, some places negative. And of course, a technology piece I think is alive and well. So that is among the reasons I agree with David that we're not going to those crazy inflation rates that we saw before. This is a phenomenon that is painful now, but we should get it under some control. Doesn't say we're going back to 1% inflation, but I think we with a lot of work, probably a recession, we can get this thing back to three ish.
John Coleman: David and Bob, you've both touched on international markets. I think, Bob, you started by talking about some of the opportunities in international markets over the course of the year so far. And David, you touched on this idea of global supply chains, etc., in your recent comments. Obviously, the Russian invasion of Ukraine was a really negative shock to the global economy. China's decision to pursue a zero-covid policy has been a negative shock to some extent, continuing to constrain supply chains. Just quick thoughts on what are the risk factors that you see now in the global economy that might impact investors here in the United States or around the world? And. Where do you think there might be opportunity in the global economy right now? And David, maybe you could start us off.
David Spika: Yeah. What's going on in China is very curious and very alarming. The Zero-Covid policy, we're hoping this is something that Xi is going to suspend once he's reelected as lifetime ruler. But it just doesn't make any sense for a country of a billion and a half people to expect a zero-covid. And that has that been a huge factor. You know, it's funny. COVID was a black swan and it has spawned other black swans. Right. It's born this runaway inflation. It's spawned, I would say, to a degree, the war in Ukraine. It spawned what's happening in China today. And so it's almost like this continuous black swan. But to me, what's happening in China is the biggest concern. China is the second largest economy in the world. They're a huge factor in the global supply chain, a huge factor in production of goods and services. And to the extent they cannot get back to a level of production that is appropriate for the rest of the world, that could create some headwinds. The other thing to recognize when it comes to Russia. If Putin were to walk out of Ukraine tomorrow, the world not going to say all is forgiven. We're going to start doing business with you again. He's a pariah. As long as he's in office, which is probably going to be an extended period of time. So those two things, which are a couple of the black swans that occurred this year, I think are going to continue to be headwinds to the global supply chain.
Bob Dole: I agree 100% with everything David just said. I'll add just one point to it. That is a continued risk and that is a supply of energy. You know, I think one of the events I'll call in an event that has not gotten enough attention is the curtailment of supply in the country that has the most opportunity to create incremental energy. And that's the United States. If you go back to January of 2021, we were coming out of covid, the demand for oil was rising quickly. And in this country, we canceled the Keystone pipeline. We put a moratorium in many ways on new drilling and made it difficult on the permit side. So economics one on one demand for something. In this case, oil is going up. Supply has been curtailed. What happens to price? Definitionally, it goes up and we're still struggling with just not enough of this stuff. As the global economy recovers, post whatever recession we're going to be in. So that remains a risk, in my judgment.
John Coleman: And Bob, just to pick up on that briefly, you know, energy markets have been highly volatile recently. And to your comments, some of that is based on policy decisions. If you have a magic wand right now and could try and convince the federal government to enact policies that you felt like would restore a semblance of normalcy to the energy markets, what would you advise the current presidential administration or Congress to do in order to support energy markets?
Bob Dole: I'll try not to be political in my answer, but, you know, I think, look, if I were the president and I believe big time in the environment and green this and green that, I think I would say, hey, folks, I believe in green just like you do. But can you give me a couple of years where I can address the problems we have right now, in particular inflation? And just I'll put it this way, open up the spigots for a while and let's let the supply try to meet the demand, bring the price down, and a lot of our inflation problem eases up. Not all of it, but a lot of it does. And then we can worry about the green stuff later. That's why I would advise the administration.
David Spika: The only issue I have with that, Bob, I agree, but the only issue I have is if I'm an oil and gas producer and if I think it's a two year window, I'm not committing billions of dollars of CapEx into development. Heck no. I produce tremendous cash flow today. My shareholders love me and I'm sitting right where I am today. I love $100 oil, so we need, quite frankly, a change in tone on the energy industry as a whole in the United States. We support you and we are going to we are going to provide what you need to be successful.
Bob Dole: You went one step beyond me. I'll sign up for that in a nanosecond. Yes.
John Coleman: It's really interesting and it will be really interesting to see how it plays out practically. Obviously, we've got elections coming up. There are two very different platforms at play and there's the chance of a divided Congress and presidency. And I think that will be one of the interesting questions along with spending as we enter that potential environment, just exactly what happens. I'll note that on the supply chain question you know in our firm will often be invested in or own companies that have supply chain considerations. One of the things we've started to look at with our CEOs, they've been struggling in an environment for two years where the supply chain was constrained and where it's been very difficult to get inventory. Therefore, everyone's been trying to get in the queue for additional inventory as they can. Everyone's been ordering. They've been telling customers that they're developing backorder lists, and we've been trying to get as much inventory as possible. One of the concerns we're continuing to navigate is what if that supply chain can stretch and continues? The other, however, is what if that loosens more than we think in the near term and we actually get a glut of inventory, which I know is something that some consumer companies are beginning to worry about as well. And this uncertainty around supply chain could create problems in either direction. Right. You could see people with a glut of inventory with working capital management problems. You could continue to see people not be able to get the components or equipment or goods that they need. And we're not certain which way that will go at the moment.
Bob Dole: Yeah, I'll comment and then let David pick it up. Look, the GDP report, we just got 200 basis points of GDP negative as a result of inventory. So it spoke loudly and clearly in the second quarter. I have to go all the way back to the pandemic. When the pandemic came, we shut down the economy. We turned it off. We've never done that before. And then we turn it back on. I think the assumption naively was I turn it back on and everything comes back to normal. Well, it's just not the case. It created all kinds of dislocations that we are still dealing with today, and that's going to take time to unwind. And my comments earlier, I said, I think some of the supply chain problems are easing a bit and I don't want to be too Pollyannish here. So I think we're solving some of them, but we got a lot of them left. Semiconductors, you know, a little less bad than it was, if you will. But we got a ways to go. And this is not going to be smooth and easy. And then if we try to layer a recession on top of it, it's going to set us back a bit in figuring out how to balance supply, demand and lots of markets. So I think there's a multi-year solve that we can't underestimate.
David Spika: Yeah, I agree completely. Just like we're feeling pain with regard to a significant increase in demand coming out of the pandemic. There's going to be pain on the supply side and we're just going to have to work through it. And quite frankly, I would just as soon see the supply chain issue clear up sooner rather than later and deal with those issues today as opposed to an extended period of stagflation.
John Coleman: Yeah, I agree with that, David, for sure. If I could bring it back onshore for a minute. One thing we haven't talked about directly yet is the housing market, which is deeply related to interest rates. We were with Jonathan Reckford, the CEO of Habitat for Humanity International recently, who quoted a statistic that I hadn't heard before. That right now is the greatest gap between median income and median home price in the history of the United States, that homes are less affordable for the average American than they have been at any point. And certainly we've been living through an incredibly hot residential housing markets. Interest rates are beginning to cool that, it would seem. What are your expectations, David, for the housing market over the course of the next 12 to 18 months? And what are some of the risk factors at play there?
David Spika: I'll begin just by saying that my daughter is going to be 30 next month and her husband of two years are looking for a house here in the Dallas area. And I said, why don't you wait another year? I don't think the time is right yet, but I do think we're going to see and we're starting to see it. You're seeing mortgage applications at 22 year lows. You're seeing sales start to decline. Prices are leveling off, not falling yet, but with mortgage rates where they are and with the point you mentioned about the disparity between house prices and income, you're going to see house prices come down. There is no question in my mind one of the good things about recessions that we all think recessions are bad and they generally are, but they tend to do a good job of reducing imbalances in the economy. That's what recessions are for it's like pruning the crate, modeling your front yard. You got to prune it back to get new growth. We need the same thing in the economy, and so that's likely to happen. The good news is, in my mind, this is not like 08, 08 was a hugely demand driven run in home prices as a result of very easy credit. This run feels like, at least here where I live in Dallas, to be more of a supply issue, we just don't have the supply that we need to meet demand today, and not just on the residential side, but if you look on the commercial side and talk about multifamily, my gosh, is there demand for multifamily? And so that demand is likely to keep a floor under prices for a period of time. But that's a regional issue. I don't think it's going to be the same here in Dallas as it is and say, northern California or someplace else. There's going to be some differences there. But bottom line, yes, there's going to be a decline in house prices. It needs to happen. It's part of the Fed's plan to eliminate to reduce the wealth effect. But we don't think it'll be anywhere near what we saw in LA.
Bob Dole: I fully agree, a business cycle one on one. The most interest rate sensitive part of our economy is housing. And so it typically is the first to go this way and the first to come back out. It is part of what the Fed does when they stimulate to get us out of recession and you start seeing life in housing. So we are in the early days of the downturn, including the price of homes, as David said.
John Coleman: I want to touch on briefly. You know, we've gotten a lot of great macroeconomic thoughts here that you're both extraordinary fund managers and you've been investing in companies for a very long time. David, I think it was you who mentioned up front that you were selectively looking at securities that might be worth investing in at companies that you thought were well positioned right now as you're both looking at specific investments. What are the types of traits you're looking for? Maybe starting with David that indicate to you that a company is ready for investment or something that you're willing to bet on through this cycle. And what do you think our listeners should be looking for?
David Spika: I think if you're going to be moving into the equity market, you need to be very focused on high quality companies, companies with good, strong fundamental characteristics, strong free cash flow, low debt. And really importantly today, pricing power, costs remain high, labor costs, input costs. Companies need to have the ability to pass those through to their customers in order to grow their earnings. Top line growth is great for everybody. It's that earnings because we're getting operating margin compression. So that high quality aspect to me is absolutely critical today. Being somewhat defensive makes sense, and that doesn't mean you just buy health care and consumer staples. There are high quality companies with defensive characteristics in every sector of the market and companies that have good earnings visibility. Right. Not your cyclical companies, but companies with good earnings visibility. That's where I would be playing today.
Bob Dole: We do not compare notes, but I would have said and I will say quality, quality, quality. And we define it three different ways. One, quality of the income statement earnings. Is it predictable? Are they measurable? Are related to cash flow? And we can call them quality of quality. The balance sheet. Can they service the debt that's on their balance sheet? Do they have debt? Will it strangle them? The things really get bad. And the third and the hardest to measure is quality of management. Have they done it before, through a cycle? Have they demonstrated they know how to cut costs, the right costs when it's time to reinvest? Can they do that intelligently? So quality, quality, quality. Now, I will say we've been on that theme for a while and as we approach a market bottom, we'll have to root out some of that quality and with put some low quality in the portfolio, because when the market turns, you don't want quality, you'll be left in the dust. You want to own the junk too soon, but start doing your homework.
David Spika: Absolutely. Agree. 100%, Bob.
John Coleman: Yeah, we were just talking here. We've had the same advice to people with regards to fund managers quality, quality and quality. Because if you think about it, it's been 15 years since we had some sort of dramatic correction. Obviously, we've had years where the markets were down marginally, that the last dramatic correction was the great financial crisis. And an extraordinary number of company leaders and fund managers really haven't had experience at the top of the house in leadership positions with an economic cycle like this. And so you've got to look to your point to those leadership teams, both at fund management houses and at individual companies that have seen cycles like this before, are intellectually prepared for it, and know what types of steps to take and what type patients to have during periods like this.
David Spika: Can I make a quick comment on that? Because I think you struck a nerve there. It's been 40 years since we've seen inflation at this level, so most people have not experienced this. But I'll tell you what's even more important in my mind, it's been 12, 14 years since we've seen a market truly react to fundamentals. A lot of people in this business have only seen a market that's been driven by monetary policy. They have no idea what happens when the Fed turns the other direction on monetary policy. They don't understand about quality, as Bob saying, and that fundamentals should be driving stock prices. And to me, that's a little concerning. And I think that's one of the reasons why the market is rallying here this week. On something that I don't think really has any merit. Oh, gee, the Fed's going to cut rates at some point. Powell told us that. So let's get back in. Well, that doesn't make any sense. We haven't even seen the earnings cuts yet. So to me, that's something that I think we need to keep an eye on.
Bob Dole: I'll extend that first of all with agreement. But we're in an environment and should be for some time where fundamentals really do matter. We have basically a decade where all you want to do is buy high duration stocks with long tail growth. Because like in the bond market, when interest rates fall, you want to own the long duration paper. What's a long duration equity? One that might earn some money and pay a dividend ten years from now. To exaggerate, to make the point. Now it's which companies are delivering the goods? Which ones aren't. And you know what the first outperforming the last don't. But that's not been normal in the last decade. It should be a year when those who do their fundamental homework have a better shot.
John Coleman: All right. I want to ask one final question before we move to our true final question about what you all are learning from scripture. Because in addition to being great investors, you're great men of faith. And I know we would all benefit from hearing what you're thinking about and what God is teaching you right now. Before we do that, I'll just ask a 10,000 foot question, which is for those investors who haven't lived through the cycle and for all of us who haven't lived through it in a while, what's your general advice to someone hoping to navigate this well and to steward their financial resources well over the coming couple of years?
David Spika: I'll go ahead. Jump in. I would say, first and foremost, for believers remember who's in control? The Lord's in control. Don't get caught up in what you're reading on Facebook or hearing on Twitter or seeing in the mainstream media the Lord's in control. The other thing I would say is recognize that it has been since 2008, since we've had a true recession. 2020 wasn't a true recession. That was self-imposed. And as I said earlier, recessions do a modicum of good for the economy. They reduce imbalances and they cleanse the economy so that we can have growth again. The third thing is recognize that valuations were way too high and we've seen a significant decline in valuations. So we're closer to the bottom, much closer than we were six months ago. And at some point, we'll be there. And if you've got some dry powder, you can benefit from that.
Bob Dole: You prompt us on this question. So I made a list of five. One recognize that what we have is not ours. It's the Lord's. And not just our money, our everything, our minds, our bodies, our relationships, everything two. Therefore, it's an awesome privilege, but also an awesome responsibility. You know, if the money is really mine. Who cares what I do with it? But if it's God's now, all of a sudden I better take care of it and be smart about it. Number three, don't get caught up in the noise and the emotion of the day. If you name the name of Jesus, people are extra watching you in periods where it's noisy and bumpy and controversial. Try to have that compass four this is for anybody, faith or not long term view. We're talking a lot about the near term. But, you know, if your time horizons 20 years, there is no 20 year period in history where stocks haven't gone up. So, you know, I don't be stupid about it, but keep that sort of thing in mind. And finally, number five, sentiment. We haven't talked about that at all. When everybody's bullish is generally a good thing to be bearish. And when everybody's bearish, which they have been being a little more constructive makes some sense. So they're the five points I would consider.
John Coleman: That's awesome advice, gentlemen. And before we wrap up, you've already started to go down this path. But even apart from financial markets, we'd really benefit from just hearing what's on your mind and what God is teaching you through Scripture right now. David, I wonder if you could kick us off just any wisdom that you've encountered lately in your Christian walk?
David Spika: Yeah, this has been a challenging year for me, personally and professionally, and so there have been periods where I've gotten a little bit discouraged. But as I'm in my quiet time, a verse to come to me recently is Galatians six nine. Let us not become weary and doing good, but at the proper time we will reap a harvest if we do not give up. Now, that's very encouraging to know that God's there. He's going to help me through the challenges I'm facing. And my part is to be obedient to him and to continue to strive to glorify him in everything I do. And I know that, GuideStone, we're doing good. We're serving those who serve the Lord. We're providing retirement for people who spend their entire life preaching the gospel. And that's important. And even when we have rough periods for 6 to 12, 24 months, it doesn't matter. Ultimately, serving God will reap rewards for us as long as we continue to be obedient to Him.
Bob Dole: Mine's not a whole lot different. I put it under the word patience in tough times. Personally and professionally, having perspective and having the patience. The patience of Job, as we often say. But even the patience the Lord showed us. I remember in the garden he was sweat and drops of blood. But, you know, he maintained his center Lord, not my will, but yours be done. So they're the kinds of things we try to remember. Look things happen in markets very quickly, but in the real world they tend to happen more slowly. And I sometimes think those of us who are in the markets taking a patient's pill once in a while will help us do a better job for our clients and not trying to anticipate every jot and tittle, but to get the longer sweep. So patients, my friend.
John Coleman: That's a, I joke all the time. We've got a couple of our fund managers. The problem with the ticker moving every second there as you're watching it is you can get tied up in the moment. And that idea that we've got faith obviously in something else and that we should be patient and think longer term is incredibly important. Bob and David, a tour de force. I would expect nothing less. I know that everyone benefited not only from your knowledge of markets, but just from your wisdom and maturity as believers. We're grateful for the work that you do in markets and on behalf of clients. We know we're stewarding resources for God's kingdom, and we're grateful to you, particularly for coming on today and sharing your thoughts. Thank you very much.
Bob Dole: Our privilege. Thank you.
David Spika: Thank you. Enjoyed it.