Episode 128 - Marks on the Markets: Standing Tall During the Recent Downturn
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In the US, public equity markets are in decline while interest rates and inflation are on the rise. In the UK a major tax announcement rocked the overseas markets. Are we headed for a worldwide recession? We discuss what it takes for investors to face the storm head-on and remain positive in the midst of it all. Joining the conversation are Justin Speer, Principal and Senior Analyst on the Public Equities team at Sovereign’s Capital, as well as Brian McClard, Head of Investments at Ronald Blue Trust, and Benjamin Bailey, Vice President of Investments and a Senior Fixed Income Investment Manager for Praxis Mutual Funds and Everence Financial. 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: This is John Coleman and welcome back to the Faith Driven Investor podcast. We're recording this just one day after the Faith Driven Investor conference this year. It was an incredible time. I know much of the content will become available over the coming days and weeks, and so we'd encourage you to dig in. And it was an encouragement to me, as always, just about the variety of different faith driven investing trends that are going on around the world. Hearing from our global colleagues in places like Africa was amazing and it was a really restorative time, so I'd encourage folks to dig in and catch up on some of that content, if you can, in the broader markets. It's been it's been a pretty wild time. We thought we had some volatility dampening and that normalcy might be returning. And instead, the last few weeks have been extraordinarily volatile in markets with a number of different topics breaking. Fortunately, as always, for our Marks on the Market series, we have a few very smart investors who are going to come talk us through that volatility, talk us through what they're seeing in markets and offer perspectives on how we might navigate those markets. Well, first joining us is Benji Bailey. Benji is the vice president of investments and senior fixed income manager for Praxis Mutual Funds. And Everence Financial, he's been in the business for 20 years or so, managing fixed income instruments, etc., and is just an extraordinary guy on those topics. Brian McClard is the director of investments and head of the Investment Strategies Group at Ronald Blue Trust Company, which obviously manages a variety of different institutional and retail clients. And Brian is in markets every day thinking about a variety of asset classes and brings a great perspective. And then we have Justin Speer, who's a principal and senior analyst with Sovereign's Capital, helping to lead the public equities team at sovereigns, having just recently developed the first public equities fund there. So gentlemen, thanks so much for coming today and talking to us through this.
Brian McClard: Pleasure to be here.
John Coleman: Benji, I'm going to start with you. Just to put you on the hot seat. You live in the fixed income markets, obviously, in addition to other markets. And one of the big pieces of information over the last couple of weeks was the recent Fed's meeting and Fed's announcements. What did you think of the most recent Federal Reserve announcement and interest rate increases? And what do you think the impact is going to continue to be on financial markets?
Benjamin Bailey: Yeah, so the Federal Reserve has a mandate. Some people call it a dual mandate. It's really three things. One is maximum employment, the other stable prices, and then moderate long term interest rates. And at this point, though, they're kind of viewing their entire goal, get inflation in check and they pretty much have nothing else in their mind. I kind of think of it. It's kind of like a young kid or actually really me that likes to order ice cream and doesn't really think about anything else whatsoever until they get that ice cream cone. That's kind of where they're at this point. But they seem to be using the playbook that they've had back from the eighties. They don't have lots of different things that they can do, but they do have the Fed funds increases or they have decreases. And they keep talking about how important it is to lower inflation. So making those Fed funds increases and talking about it, the combination of those things is really what they're trying to do to give people comfort that they're very serious about inflation. So I don't want to get too deep into this kind of bond nerd area necessarily, but when you think about where we're at now, so we're at a 3 to 3 in a quarter Fed funds rate, the market's pricing in moves that are higher. But just because they're pricing in another one and a half percent move, that doesn't necessarily mean that long term interest rates have to move up another one and a half percent. Their more recent moves are really going to be a bigger deal for like your money market account, maybe your savings account. So a lot of these things that they're already priced in, so they raise it one and a half more percent than really interest rates are kind of where they need to be at this point. But if the market get surprised and maybe inflation stays higher, you know, then they could move it up a little bit more. So the good thing is, you know, that we've actually have, you know, higher rates for savers. So that's really a positive thing. And we have a lot of kind of this negativity already baked into the fixed income market.
John Coleman: That's super helpful, Benji. And I do want to circle back to more bond nerd stuff in just a moment with how you're thinking about those markets. And I definitely empathize with the fixation on ice cream. It feels like we get along on that crime. Before we dig into that too deeply, though, Brian, I was hoping to pitch it over to you. Obviously, there's been a lot of volatility in public markets, both as a result of the Fed announcement, as well as maybe some other compounding factors. What are you seeing in public markets right now and what do you think has driven the decline over the last couple of weeks?
Brian McClard: And, of course, has been a volatile market the entire year. And really with this latest downturn from August, I think we've seen something like a 15% sell off in the S&P alone. So this last quarter has been enough volatility for a full year, even though it's only been the last couple of months. But believe it or not, it's really been because of some demonstrated economic resilience. We've had inflation be a little bit stubborn to come down maybe, and I don't know if we'll get into that or not, but because of those things, the Fed has really just reiterated their their idea that they're going to keep at it raising rates. Just kind of as Benjamin was mentioning, you know, until inflation softens. And so you've had the situation where good news is bad news. And that means what's happening is the market's trying to stay ahead of the Fed, and that's what you're seeing in prices.
John Coleman: That's helpful. And, Justin, maybe I'll come over to you on that front. Are we reaching a bottom? I mean, we have seen these precipitous declines building on losses earlier in the year. Now, when is the bottom? I mean, do you think we have more room to fall? And what are you looking to figure out if we've reached the trough?
Justin Speer: You know, they don't want to come out and say that I know where the bottom is going to be expressed. But I think it comes down to answering this question. It's going to come down to whether or not we're heading toward a hard landing or a soft landing. And I believe the market right now is pricing in in the equity markets something closer to a soft landing scenario today. And I'll talk about that in a minute. But just to kind of retrace where we are, the market is back to the recent low that it achieved on June 16th. So the market from its peak in January. And I when I say the market, the Russell 3000, the broad U.S. market is down 25% from the peak that it achieved in early January. So just for perspective, that's the fifth worst decline from a market peak since 1990. We've had, in addition to this, seven other bear markets since 1990. This is the fifth worst in historically. So you think about 105 days on where we're literally as of yesterday, right on top of the low, we just retraced back to that low 105 days from that bottom in mid-June, and we achieved that 25% decline. The market historically, if we had bottomed, is up closer to 30% on average, 105 days off of a bottom. And we're currently flat because of inflation globally being higher and stickier than the market expected, which means policymakers, as Benji was talking about, need to push harder and longer on removing the excess liquidity from the global system. So what we seen we see an interest rate spike, I mean, a dramatic spike like the speed to which this move has taken place. We have not seen in a very long time in terms of absolute stuff like this, the fastest year over year increase since the early nineties, but also a much lower base. So it's a big move in rates. The yield curve turned negative for the first time since 2007. So when I look at twos versus tens, it's negative. From the first time since 2007, business conditions are cooling and the dollar has raised higher against all other currencies. So postively the labor environment has been extremely tight and consumer confidence is held up and spending is held up pretty well outside of housing, which has collapsed to below pre-pandemic levels. But the bond market and the stock market are telling us that the labor environment, in my opinion, is about to face some headwinds. So we'll see how consumer spending holds up. But ultimately, the pullback in the market has certainly been anticipating some of this. So let's pull back to what we've been thinking about. As we've known, this is going to be coming to a certain extent, this removal of liquidity and excess stimulus. But I believe that most of the sell off has merely just removed a chunk of the post-pandemic froth in the S&P 500 multiple. You know, so if we think about the sell off, it's been painful, but it doesn't appear that the market is pricing in a deep recession here. The multiple right now and the S&P 500 is really approximating the 20 year average on forward estimates. And I think that those estimates are probably at risk of being revised lower because I look to 2023. So literally, I think what we have, we had a big party and we had $7 trillion of stimulus shoved in our pockets and free money and it led to the multiple going up to 22, 23, 24 times as recently as last year. And so all we've done is remove that froth. The multiple is literally on top of its 20 year average now. But a big question for me as I kind of think about this that remains elusive is how much consensus analyst board expectations for earnings will need to be revised lower in the coming quarters amid a slowing in demand. The lagged filter through that continues of accelerating cost inflation. That's going to work its way into the P&L, into the margin structures of these companies. So I expect that the upcoming earnings seasons will continue to provide some answers on that front. So estimates have come down about 3% on 2023 estimates. And as we consider the removal of stimulus, we've done that back of the envelope. Just removing that stimulus, assuming that the pandemic never happened, I think we probably have another 10 to 15% risk to earnings estimates. Some of these estimates, I think, are embedding the idea that stimulus is going to go on forever. And we just don't see that. Obviously, we're going to see the opposite. So the debate we face today as we wrap this up is if policymakers can remove stimulus, camp down inflation without creating a hard landing scenario and it's not [...], we don't know. I think that's the real debate. But we don't have to look far back in history to see other periods of extreme excess and how long it took for the market to break the tech wreck. And the early 2000 consisted of two painful pullbacks in the market. From August 2000 through September 2001, about 385 days, the market fell 36% peak to trough and it recovered. But then it fell back again. In May 2002 to October 2002, it fell another 30%. And then in the Great Recession, the housing bubble that corrected it took the market about 500 days to work without peak the trough, and that was a 55% correction. So that's the question. Can we get out of this excess liquidity? Can policymakers globally do it without creating a hard landing or can we get through a soft landing scenario? And I think that's the major question for all of us.
John Coleman: So I want to pause right here maybe and just reflect on that. And Brian and Benji turn to you all just for your perspectives, because I know this is top of mind for everyone. Reflecting on what Justin just said. What are your thoughts? Do you see the world in the same way? Do you think we're actually nearer a trough than that? What are your perspectives on what's left in the volatility and public equity markets right now?
Brian McClard: Yeah, I thought that was a great analysis that Justin laid out. You know, the drawdown this year, primarily valuation related in our minds because of, as you mentioned, the sharp readjustment of the discount rate. When you look at P/E right now, they're really commensurate with where Treasury yields are. And you're not seeing corporate spreads blow out either. And so in our minds, recession risk is not priced in right now. So if you have a recession, we believe there's more pain to come if you don't have a recession. You know what? We actually could probably be near the bottom.
Benjamin Bailey: Yeah. And for me, kind of just being on the bonds side, I almost feel like I should say I'm sorry or something from the beginning of the year just because, you know, like the dividend discount models and those types of things, that's when interest rates started to go up and people are like, Oh my goodness. Well, if I have these, you know, high tech companies and they have earnings out multiple, multiple years, then it's one thing if interest rates are at 1%, but something much different if they're out three and a half percent. But yeah, I mean, there's certainly a lot of negativity that's baked in at this point. But certainly, I mean, it doesn't seem like all of it is necessarily baked in.
John Coleman: Benji, I want to kind of pause with you for a moment and think about bond prices, about debt investments right now generally. You know, I've thought back to my childhood when you could get a certificate of deposit that would yield 7% or you could put money in a savings account and get a few percent. And there are a lot of people now who have never experienced that effectively since 2007, 2008. There's no real return on cash at all. And some of these instruments, like CDs, have just become almost nonexistent. As you look at this environment right now, certainly this year, bond prices have been highly volatile as well. How do you think about approaching debt markets right now, where there are opportunities and where there are great risks in your mind?
Benjamin Bailey: Yeah, I mean, I mentioned a little bit about being sorry. And I think, you know, part of this is generally bonds have kind of played this diversification where it's just been they haven't played that role so far this year. I mean, in the 44 year history of the Bloomberg Aggregate Index, every time that stock returns have been negative, you know, bond returns have been at least flat or slightly positive. And they haven't done that so far this year. But I also think I mean, at this point, they're also offering really good value. Right. So the yield on that, Bloomberg Aggregate, and just as a reminder, that's kind of like the S&P 500 for the fixed income markets and that yield is right now at 4.7%. So almost 5%. It hasn't even been this high since 2008. And that was obviously during the Great Recession. And so and total returns for bonds, they've kind of have two main components in that. The one part is an income return or kind of the coupon or yield, and the other part is the price return that you get. So we started the year with just such low rates, it was about 1.7%. And that means that over a 12 month period, your income return would be, you know, that 1.7%. But since interest rates have gone up about 3%, right, that 1.7 up to the 4.7, that means that, you know, you've gotten your income return of 1.7 or a little more because interest rates have been going up. But that's not nearly enough, you know, really to overcome these negative price returns that we've had of about -16%. So the net total return kind of net net gives you in this 13% area. But I think the good part, and again, while I'm excited about this, is that the math works a lot differently now. So interest rates go up a little bit more. Yeah, you can have a slightly negative return over the next 12 months, but with interest rates is high at almost 5%, you're in a much better balance kind of between your positive scenarios versus your negative scenarios. And certainly things can get worse. I'm a bond guy, so I can always think of bad things that can possibly happen, no doubt. But, you know, if they stay solid or kind of I mean, even if they would actually have interest rates, it would fall a little bit. You would have your yield of about 5% and maybe even a little bit of positive price returns. I think, you know, big picture, this is actually a really good time for savers.
John Coleman: That's really, really helpful. Brian, I want to back out from the U.S. markets for just a moment and look internationally, particularly at our friends across the Atlantic in the United Kingdom. You know, recently there was a new British government that came into power. They announced a new tax cuts, which I think the markets viewed as potentially inflationary. And then the Bank of England announced some actions. And there was a ton of volatility overseas. I think at one point the pound actually dropped to near parity with the dollar, which has never been the case before. What's your perspective on what's happening in the U.K. right now and any overflow impacts that U.S. investors can expect to see from that?
Brian McClard: That's a great question, actually. And as you mentioned, for those who didn't hear the whole situation, whenever the new government announces big tax cuts, they were the largest in 50 years and they were going to be deficit financed. And that was really concerning, I think, to the market because they viewed it as fiscally irresponsible and so they lost confidence. That's what kind of caused the sell off in the currency. And of course, the rates rose. But a big piece of that that came up was the fact that the pension fund industry is so large in the U.K. is about 120% of GDP by some estimates. And because of the way they structure their investments, in essence, what it means is that when interest rates rise precipitously, they receive margin calls which require them to post collateral, which means they have to sell assets which causes a spiral. So the Bank of England had to step in and defend its currency, in other words, to keep it from going down and to also drive rates back down again and just really reestablish kind of an orderly market. So the reason why that's important is because that's essentially put them on the opposite course where central banks have been doing around the world. Right. Because everyone's been tightening in order to fight inflation. Now it looks like the U.K. is going the other way. And so, you know, they're wanting are you going to be able to fight inflation? Are you just going to exacerbate it and make it worse? And I think during times of stress, during times where liquidity is flowing out, I think you're going to see these types of tests on the financial plumbing come to bear a lot more. So it's very normal from that perspective to stress as the system stretches to to stress, test it and see what breaks. There's speculative attacks even from folks who are trying to find opportunities. They are they we can see can we profit from there? And you know what? The U.K. isn't the only one going through this. It's just they're the ones who are maybe showing a little bit more severe cracks at this moment. I mean, the Bank of Japan had to intervene to defend their currency. China's talking about it. And so this is a normal part of this environment. And you're going to see this. This is more of a liquidity issue in my mind, that it is a solvency issue. Yeah, we've got big long term debt issues on public balance sheets around the world and it has to be reconciled with that. I don't believe they're going to be reconciled in this way and in this time. So for the time being, I feel like, you know, there's a little bit of a hiccup and things return to normal and then we're good again.
John Coleman: Yeah, it's certainly interesting. Oh, go ahead, Benji.
Benjamin Bailey: I am just going to jump in real quick. Just to say, I mean, a couple of bonds that I thought were just it was pretty wild what happened in the last few days. And they're like the United Kingdom in their 30 years bond in one day went up 100 basis points or 1%, meaning like the price return on that was negative almost 20% in one single day. And then the next day. Then, of course, then, you know, they decided that they needed to jump in and it fell back about 1%. But just think about extreme volatility. When you own those long term bonds, you know, fall 19% and go up 19%. It is shocking what happened.
Justin Speer: Yeah, I think it just shows in these moments where you're trying to fight inflation, pull back on liquidity, there's opportunities for mistakes and policy mismatch that create this more risks. And so it's something that I think every asset class we all just have to be mindful of and just be prepared for and take advantage of.
John Coleman: And this is in some ways the most complex economic environment that any of us have operated through. Right. I mean, if you think about just the U.S. market, this combination of inflation and recessionary pressures in this kind of mix hasn't happened since the late seventies, early eighties. And then you throw in on top of that this process of de-globalization for probably the first time in many decades. The overseas risks with Ukraine and other economic moves by central banks around the world. There is just a ton of complexity here that makes it difficult, I think, to sort out which of those different factors is going to weigh the most on markets, right? Like what is actually going to win out in the prices of these different instruments?
Brian McClard: What in a brewing long term question as well that we've not seen in our lifetime is just the level of indebtedness that exists globally with these governments and we don't know how that resolves. So that's a big question.
John Coleman: Yeah, 100% right, Brian. I mean, the levels of data around the world are consistently higher, at least in the developed world than they've been at any point in history, to my knowledge. I mean, coming out of world wars, some of the major powers obviously had a heavy degree of indebtedness. But this kind of consistent structural indebtedness in the developed world is a relatively recent phenomenon. And, you know, we were told for a while by experts to not worry about it too much. But I think in environments like this, you start to worry about it. And interest payments on the debt become really concerning actually in this type of environment. I want to zero in on one specific aspect of that and then maybe pull out and ask you guys for a little optimism before we move to that. Justin, the inflation question has come up again and again throughout this question. Maybe you could lead us off, but I'd welcome other comments with the Fed's actions. Do you think we're actually getting close to taming inflation, or is there still a lot of work to go? And is the Fed going to be capable of doing it on its own, or are the actions of the US federal government going to play a meaningful part there as well?
Justin Speer: Well, in terms of, you know, are we near taming? I do believe we are going to tame. I think there's blunt instruments, but there are tools in the arsenal of policymakers that if we don't, it's because we made a mistake. But I believe so. And we've already started to see some of the embers of that. The shift hiring rates have already catalyzed a big contraction in domestic housing activity that's ultimately going to cool inflationary pressures in the housing component of CPI. We've also seen oil in a broader basket of commodities sliding sequentially, which implies less year over year headwinds on the horizon for producers of goods. In the next 3 to 6 months, the yield curve has inverted, which suggests the market is bracing for a slowdown or even a contraction in the economy. And so ultimately, I think going to result in a rise in the unemployment rate, slow wage growth. And I really think that's the goal of the Fed is to do that, but do it without causing a hard landing. That's the delicate balance. But lastly, just looking at tips and maybe, Benji, you could talk about this, but looking at tips, the break even spread on the five year treasuries. I pulled it up last night. So the five year treasuries less the five year tips is implying about 2.4% inflation on average over the next five years, while that spread has been subsiding after peaking at over three in April. So it tells you that the bond market is telling you that they believe eventually we're going in front of this and ahead of this. But what does it mean in terms of just this inflation, the impact of inflation in the coming year? What's the impact? Big picture for companies, I think there's different constituents to consider. But for companies in a weak demand environment and I'm thinking anything with volumes below 2%, so I'm actually going to see volume fall negative. I believe in certain areas of the economy. It's extremely difficult to deal with inflation if you're a company, just a traditional industrial company, big picture, weak demand, inflation coming through your P&L, very difficult to pass that on. You don't get volume leverage and it's very difficult to pass prices on to your customers in that kind of an environment. The other thing that's happened is because of COVID and one of the big reasons for the inflation is we've had not just stimulus, but we've had supply chain disruptions that have been a function of COVID and absenteeism, but also government benefits that have incentivized people to stay at home. And so there's that, too. But all these pictures of, I think, some of that element, that tension within the labor force is alleviating demand. Slowing is going to alleviate some of the supply chains. And that's going to help. I think on the inflationary front, the big picture, it's very difficult for these companies to deal with it. And we may see with risks to margins higher, we may see that lead to companies laying off folks, reducing wages, in other instances finding innovative ways to become more productive, which is something that we'll be looking for for households. It's just tough. It's tough for us middle class folks. It's tough for the middle class and lower income wage earners. We have to continue to respond by adjusting our spending and for our family, last week it was ribeye and this week it's tuna fish, and next week it may be dog food. And my dog does not like sharing, you know, so we have to make adjustments. But also it's very tough. And for policymakers, this is a major ballot issue. You know, for them it's more of a what we've already seen the pressure on them to respond. And there's potential for policy mistakes that we saw like we saw this week or perception of policy mistakes anyway, in these scenarios or policy mismatch from central bankers and governments like we've seen. And for us though, at Sovereigns like we want to see companies responding for the rank and file for the people serving their people, their team members, they're going to be opportunities to serve in this environment. And our desire really is to see leaders and companies offering programs to help their employees cope with this environment. It's a big challenge. It's also a big opportunity to serve and point people to Christ.
John Coleman: That's great. Brian, Benji Any difference of opinion on the inflationary front?
Brian McClard: I thought that was a great analysis. I think in terms of a framework maybe of how we kind of view it look pre 2019, the Fed was not able to get inflation essentially above 2%. Right now, suddenly we're at 8%. So it's kind of like, okay, what happened? Well, obviously, we believe some of the culprits are really that fiscal and monetary injection. So filling a $2 trillion hole with $10 trillion. Right. That extra 8 trillion has to go somewhere. So because of that, though, we view that that it's temporary kind of adjust and was alluding to but how temporary just the two questions and the two questions are how fast and how far. In other words, how far does it go from 8% now to 2% where it was before or some, which is, by the way, the Fed's target for inflation, or does it in somewhere a little bit above 2%? And the how far kind of relates to what's changed and how fast kind of relates to what's sticky, what's sticky right now and what needs to change there. But it is suffice to say, I think there are some sticky items that make it a little bit slower. I think there's a couple of things that have changed. Inflation comes down mostly, but maybe not all the way. Long term drivers like the debt issue we talked about the aging demographics and just really the continued productivity enhancements. I think the long term forces will still be inexorably lower from that standpoint.
John Coleman: Well, let me include some of the market commentary, and then I want to switch to more faith driven components of this, just how you all are thinking about managing clients, for example, and faith driven impacts. But I do want to end on a positive note. So maybe around the horns, starting with Benji. Give me one thing you're optimistic about, Benji. You've probably been the most optimistic given that you are in some of the bond markets right now. But give me one thing you're optimistic about in investing right now.
Benjamin Bailey: Yeah, well, I mean, I really do like the higher yields. I mentioned that before. But I do think to just the math, which I think the math is a little cleaner in terms of bonds and you think about yield. And when they go higher, that's kind of your future returns. But I still think stock prices, yeah, we could go a little bit lower, but in the whole scheme of things is, you know, we had such high PE ratios and that meant future returns are going to be pretty low. And so this kind of adjustment back to, you know, sadly the E is going a little bit lower. Not obviously the price is going quite a bit lower. But I mean, I see this as a positive just kind of all around in that your basic 60-40 like 60 stock 40 bonds portfolio really has a better outlook than what it would have had a year ago or certainly two years ago. So that to me is a good positive.
John Coleman: Brian, what do you think something you're optimistic about in investments?
Brian McClard: Okay. So Benji took my number one, which is the yield that but you know what? That shows that how important it is that there is yield again. And so I think that's important. But let me throw out my second choice that I would throw out there is the fact that these economic woes that we have out there, that we're facing, they're known. And believe it or not, I'm almost scared to say it. But the fact that we're close to crisis levels in some cases, like with energy in Europe and some of these things, because what that means historically, what we observe is that crisis brings opportunity right, you hear necessity is the mother of all invention and is during those times whenever we know the issues and then we can come together, we can solve them and we can have a better and more robust future. And so I'm very optimistic that our standpoint you can look at example after example, historically Asian debt crisis, 97 and 98. You know, it was painful, but it's led to a lot more resilient economies with better policies for the most part, and improving, just as one example. And so very excited about what's going to come out the other side of this painful time.
John Coleman: Justin. Round us out.
Justin Speer: Yeah. So, you know, shameless plug for the firm here at Sovereign. You know, our mission is to love God and love our neighbor through investing. And that mission really stays true irrespective of market environment. We have a dual mandate for our public equity platform and goal of generating returns, at least in line with the broader benchmark market. And secondly, striving for a deeper spiritual integration within the companies who we come alongside and engage them and leaders and who invest sharing best practices, putting them in a community with other like minded CEOs. So on the performance side of the ledger, yeah, I mean, you in a career, you don't get many of these opportunities. You know these are pretty rare and an opportunity to serve our clients and put them in some pretty compelling opportunities. We're actually starting to see it, particularly in smallcap growth realm, seeing some really interesting opportunities there already. Companies whose stocks have just been smashed disproportionately and in some cases it's just merely a liquidity event. You're calling a rally. What's going on? There's no news. It's a hedge fund selling out. Oh, well, this is a great opportunity. So there are opportunities for longer term investors in a long term, and there's going to be some mismatch in strategies. A lot of hedge funds are short term focus, we are long term focused. So they may be making the right move now, but in the long run, it may not be a good move for us. That's an opportunity that can emerge for our clients in the long run. But also really important on the other side is the right opportunities for us in an already has to serve and support these leaders of these companies who are facing a lot of pressure right now. Not just performance but there's also some political things that they're dealing with. Sorry about that. In the long run.
John Coleman: That is one of Justin's company calling, he get good counsel.
Justin Speer: I know I asked for a stock pick over here and I but this is giving us opportunities to share best practices, commune with them, and hopefully God can make a difference for them and our clients in these periods of volatility and interaction. So it's actually accelerated some relationships for us that are really important. Part of our process.
Brian McClard: I love it.
Brian McClard: That's really good. Justin and Justin is kind of talking to what we think of as positive spiritual integration in public equity markets in addition to our alongside what people conventionally think of negative screening, which is how do you positively influence or engage companies? You know, Benji, one of the things we've had less time to dig into is this idea of how to do that in fixed income markets. Right. And it does look a little bit different, I think, than equity holdings. How do you approach this idea of faith integration in fixed income markets?
Benjamin Bailey: Yeah. So I mean, what we do at the Praxis Mutual Fund, we call it Stewardship Investing. So we're thinking about being stewards not only of the money and having appropriate returns, but obviously they're God's resources in the end. So we want to be stewards of that and I think it is quite a bit different in a lot of ways between equities and bonds, and it can be somewhat partial, but equity investors, they can buy stocks and they can be invested in community or creation benefiting type things. But I think in the fixed income markets we're really offered a unique opportunity. So an example, earlier this year we bought a bond, has a government guarantee, so it's quite safe, got a little extra yield than what you would with the US Treasury and all that money is going to supply clean water and good sanitation for 5 million people in Southeast Asian and Africa. So our yield was the same as other similar response, but we were literally enabling people to get water that they wouldn't have gotten before. Matthew 25:35, says, So I was thirsty and you gave me something to drink, right? So and talk about making an impact on someone's life. And we did do this in a mutual fund that people are able to buy, that they're buying, you know, for a retirement or saving for their kids college fund. But talk about just making a direct impact on someone making that difference, and you can do it in your bond fund. So I think that's an exciting thing that, you know, Bonds can offer that real direct impact.
John Coleman: And I love that. That's an awesome word, Brian, maybe to round out. And we're going to circle back to everyone on the question we like to in the podcast on which is what are you learning right now through Scripture that you want to share with others? Before we do that? Brian, obviously, you're in touch every day with a number of investors, right, with individuals who are trying to weather these markets. How do you and your colleagues just think about helping individual clients, whether these markets right now and what kind of counsel are you providing them?
Brian McClard: Yeah, that's a good question. That's really at the heart of what we do, isn't it? Because no one enjoys these types of markets. But, you know, the fact of the matter is, these markets are part and parcel of the investing experience. And we really believe the reason why the vast majority of our clients are really in a good place, even during this uncertain time, is because we really try hard to tie the investment portfolios directly back to the client's financial plan. And and more specifically, I would say to the time horizon of when the client needs their money so that they can feel comfortable that their goals aren't in jeopardy during these kind of uncertain periods. And so that's one really critical part of it. And I know it's human nature to worry during these times that I still think it's okay to worry during these times because it points directly back to that plan because, you know, one wise person said, if you worry, then you don't have to worry. Right. And the meaning is, is that if you're worried, then you're prepared, you're doing something about it. And I would add to that, it's not what keeps you up at night that you should be concerned with, but it's what wakes you from a dead sleep. Right? And so that's the importance and that's the value of the plan. You know, these rough seas, they're just a normal and expected part of the journey, but you never really reach your destination unless you leave the port. And so that's what we're here to do with our clients.
John Coleman: It's really great, Brian, to conclude, as we maybe offer some counsel to everybody out there. We do want to start on a spiritual topic and Justin, we'll start with you, maybe just a couple of minutes apiece. What are you learning through scripture right now that you want to share with others?
Justin Speer: No at the firm here for about a year now. And I'm just learning the power of culture and the power of servant leadership and what that can do for any organization, for not just companies, but my household, for families, for governments, for business. It's a really powerful model that was founded by Jesus Christ. And I'm just reminded of Mark, chapter ten, verse 44, where Jesus is teaching all of us, teaching his disciples who had a heart problem about being the greatest. He says, Whoever desires to be greatest among you, you need to be slave of all, servant of all, for even the son of man did not come to be served, but to serve and for Jesus. It wasn't just words. It was really powerful actions that demonstrated that he really meant it. And for me, I want to be great in his eyes. And it's a real powerful reminder. But we're finding companies with what we call level five leadership, [...] level five leaders, who is humble, passion about their business. But we're finding these incredible leaders who are trying to honor God and running a business, loving on their employees, creating these incredible cultures in a time where it's really hard to attract and retain talent. These companies have a bit of a competitive advantage I think in all different stripes of industries and sectors. I'm just it's really powerful to learn that. And I've been in the game a long time. I've been doing it for 20 years, investing now, come to work with my lunch pal, my little BCF, and get in front of these leaders and talk to them about what, you know, what are we going to see in the next year or two? Never really talk about culture that's so powerful. A lot of that goes into generating these great businesses that generate good returns for their employees. But I'm learning on time and I'm just thankful for the opportunity learn. And it's making me hopefully a better person because when you read these passages, you know, sometimes I tend to think about other people. But really I need to be thinking, master, is that I mean, are you trying to tell me something? And so that's one and one more is just first Timothy 6:6 when Paul says, you know for godliness with contentment is great game and these types of environments, be godly, be content in whatever circumstance we happen to be in great game, not necessarily in this life, but in life to come. And it's it's a good reminder for me these types of times.
John Coleman: Benji, what's on your mind?
Benjamin Bailey: Yeah. So I think that God's been working with me on as am I looking for peace in difficult times of life, or am I looking for peace as in like calm, tranquility in my life that really just isn't going to be there. So our church is doing this series. It just finished it up on an is titled Flourish and a lady shared her struggles with cancer and just really sad things that she went through. And she read a verse as Isaiah 26 three and it said, You will keep in perfect peace all who trust in you and all whose thoughts are fixed on you. You know, so interesting, though, when I think of that, though, when I hear that and I think so God wasn't even offering her peace like calm, peaceful ocean, no waves. You really instead he is offering her this peace that even during this rotten thing that she was going through, that her body was going through, that he was going to be giving her that peace. And I think sometimes I want that kind of calm, peaceful ocean, you know, just kind of laying out there. And I get frustrated when things get hectic or they're busy and stressful, but God isn't offering me kids that are do exactly as I say. That would be fun at certain points. That doesn't seem to work out many times, but or really a job that doesn't have stress. Right. Because he wants to be that peace even when my life is in tumult. Right. So I need to be reminded of that because otherwise, I mean, I don't even know why I want that, because the stress free life isn't even what I should desire in the first place, because I really just want to make a difference. I want to make an impact. And when you're doing that, I really need God to be that peace for me, even while I am, you know, probably ruffling feathers here or there or doing things that make my kids frustrated or whatever it might be. But really that he can be that peace for me when my thoughts are fixed on God. So that was an important thing that I needed to relearn, I guess.
John Coleman: Why don't you wrap this up, Brian?
Brian McClard: Yeah. So, Benji, that's a great truth. I tell you, it seems like peace is something that this entire culture is looking for and is just not finding. I read some headlines somewhere that said that they were recommending that all adults under the age of 65 be mandatorily tested for anxiety because peace has been so elusive. And we're actually going through a study right now and the Holy Spirit has been fantastic. In First Corinthians two, it says that we understand the spiritual truths that are freely given us by God through the Holy Spirit. So in other words, we think about wisdom and peace and patience. It says not with human wisdom, because the natural person does not understand the things of the Spirit of God, because they are spiritually discerned, right? Not through our flesh. And so I think about how day in and day out, especially today, right? We have so many gifts, so many abilities, so many tools, so many resources. We have Google at our fingertips. And so it's so easy to try and reason our way through life, to muscle our way through the challenging problems of the day. But it is critical that we are walking. In fact, I'm saying this to myself, that I'm walking in the spirit and not relying on my own power in order to find wisdom and peace and patience. Right. And which, of course, not only yields spiritual benefits, but physical benefits as well.
John Coleman: Guys, this is a fantastic discussion. Those are great words to end on. Again, we've got Benji Bailey from Praxis Mutual Funds, Brian McClard from Ronald Blue Trust and Justin Speer from Sovereign's Capital. We're grateful for your time, guys, and we hope that you'll come back to the FDI podcast again sometime soon. Thank you.
Justin Speer: Thank you all.
Brian McClard: Thanks, guys.