Episode 143 - Marks on the Markets: Predictions for 2023
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Each month, we bring in experts to give an overview of the market’s current state.
On this episode, we have frequent contributors Bob Doll and David Spika take us through their 2022 reflections and predictions for 2023. Bob is the Chief Investment Officer at Crossmark Global and David has the same role at GuideStone Investments. Both men bring incredible insight to the conversation.
Throughout the conversation, the two also chat about how Christian investors can think through layoffs, the potential recession, and ESG investing. David even makes a Super Bowl prediction.
Check out the episode and don’t forget to rate and follow the show on whatever platform you use to listen.
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 back to the Faith Driven Investor podcast. This is John Coleman and this is our monthly Mark's On the Market podcast, where we talk to experts in the industry who are also people of great faith about what they're seeing in markets and highlight some of the best Christian minds in faith driven investing. Today is a real treat because we certainly have some of the greatest Christian minds in Faith Driven Investing in Bob Dole and David Spika. Bob is the Chief investment officer of Cross Mark Global Investments. David is the President and Chief Investment Officer of Guide Stone Capital Management. Both have extraordinary careers in the industry. They have a record of success and we are so grateful to have them on today. So welcome, Bob and David.
Bob Dole: Thank you John.
David Spika: Thank you. Happy to be here.
John Coleman: Well, we want to dive right in. You know, we're entering the month of February here. Before we look at this month and 2023, talk to us about your big takeaways from the market in 2022. And Bob, maybe you could kick us off.
Bob Dole: Sure first word that comes to mind is, wow, I mean, what a year it was in so many ways, mostly on the negative side. You know, when you do these ten silly predictions every year and we actually did say stocks and bonds would both be down in 2022, but never thought it would be by the magnitude. It's the first time in 50 years that stocks and bonds were both down three quarters in a row.
John Coleman: Wow.
Bob Dole: I think that's a superlative. I'm also struck by the amount by which value outperformed growth and the environment that transpired. You would expect that, but the magnitude was amazing. The final thing I would say off top of my head is how well international stocks did versus U.S. stocks. All those problems internationally and of course, international markets, most of them went down, but they went down less than the US.
David Spika: Yeah, I don't want to trump you, Bob, but I had seen that we saw stocks and bonds both down more than 10% for the first time since the seventies in the 1870s.
John Coleman: Whoa.
David Spika: Yes, indeed. I don't know what bonds we were trading in the 1870s, but something was being traded. So it's been a long, long time. The thing that struck me about last year, though, was how ill prepared we all were for what occurred. If you go back and look at what the market expected for Fed rate hikes in December of 2021, I think we thought the Fed was going to raise 25 basis points two or three times. We ended up going up 450 basis points. Nobody is prepared for that. Nobody was prepared for 9% inflation and that caught everyone off guard. And I think what it taught us is that we can't get too confident in our expectations and our predictions. We have to be willing to pivot and to humble ourselves and say, I was wrong because things often turn out differently than we expect.
Bob Dole: Well-said.
John Coleman: Well, and speaking of pivoting, we have flipped the calendar year, Bob. It was a crazy year in markets in 2022. It's shaping up to be an interesting year in markets this year and in the business community. One of the trends that we're seeing really prominently right now is layoffs among technology companies, including many companies that have never broached this before. Firms like Amazon, Google and Meta have had large layoffs, succeeding all those announced at Twitter previously in the Go Private there. And a host of other tech firms have made similar moves. David, I want to start with you. What does this tell you about tech companies in the U.S. And do you see these layoff announcements, apart from the human implications which will come to you as a positive or negative for the future of those companies?
David Spika: I think what we need to recognize is that what's happening in the economy, whether it be in tech companies or financial service companies, is we're seeing the job market start to weaken. Now, there's two things that have created the situation we had over hiring during the pandemic, particularly the financial services sector. And we're also going into a weaker economic environment. Labor has got to weaken and that's what has to happen. The Fed can't engineer a better supply chain, but they can engineer weaker spending. And that's exactly what we're seeing with these layoffs.
John Coleman: Bob, do you have any thoughts on the layoffs that are happening?
Bob Dole: You know, first of all, I agree with David. What I add to it is, look, these companies are facing top line growth is slowing and inevitably they're concerned about profits and profit margins. And where is the economy going? How long will this weakness last? And so they have to trim their costs. And for a lot of tech companies, the biggest costs, labor. And so we're seeing these announcements probably more to come. I guess what I would add is tech companies don't have a lot of people compared to a lot of other industries. So the reason the job market, so far has remained strong as the big employers, retail, restaurants, they're still looking for employees. They can't find them at the wage rates. And so we see these tech layoffs and they are big and they're important. But relative, the size of the labor force still not affected things all that much.
John Coleman: Yeah, we've been talking in our firm a little bit about the movement in technology potentially being structural in that they had become extremely overstaffed, potentially. I think Twitter was the canary in the coal mine there. There were a lot of folks who weren't performing functions that were critical to the operations of the business. And a reckoning was going to happen at some point. And David, you know, to your point about this being really a cut primarily of the over hiring from the pandemic, I think a lot of these layoffs that have been announced, even though they're quite broad, are actually just returning to something like 2021 or 2020 staffing levels. You know, this hasn't cut deeply. And from my point of view, it is, again, will come to the human implications. But just from a leadership of the company point of view, it's encouraging them to see them emphasizing discipline as part of their management toolkit. Now, where they haven't had to do that quite as much in the past.
David Spika: And John, on that point I saw recently where BlackRock, even though they're laying people off, has stated that they want to keep employment levels flat this year. So they may be replacing higher wage workers with lower wage workers as a way to manage their costs. Bob's right, 70% of their costs are labor, so that may be part of what's going on as well.
John Coleman: Let me zero in on one topic here and maybe, Bob, you could lead us off. When we talk about layoffs. Obviously, there's a financial component to that within companies, but there's a human component. We may be heading into something like a recession. It may not be as deep as some people think, but it may. As Christian investors and business leaders. How do we think about layoffs and how do we think about treatment of employees in times like a recession when these reductions become necessary?
Bob Dole: Yeah, great question. I think we start with the observation that, look, business cycles are part of life and you get expansionary phases where you hire, hopefully not over hire or perhaps they do this, we just comment it and then you get the other side of it and you've got to trim your costs. And labor is one place that it goes. I love employers that have variable part of the compensation, so they may end up laying off fewer workers and spreading the difficult news across the workforce more so we pay attention. That sort of thing, of course, is how do you handle as a company the policy of a layoffs, You know, how do you treat your workers? Is there a period of time where you hold them over? Is there a method by which under certain circumstances you can come back? What is the safety net that might be put in place? Are we treating this people as human beings rather than just numbers? And that's, in my view, part of the values based investing. How do companies approach the layoffs that can often be necessary?
David Spika: Now, something else to note is that we have a responsibility to God and to our clients to deliver the best products and services we can. So if you go back to the old Jack Welch model, what did he do every year he got rid of the D players. Now, that sounds very callous, but in an environment like this where the job market is so strong, this is an opportunity to help some of the folks that really aren't a good fit in your firm, find a better opportunity someplace else. And the good news for them is there's 4 million excess jobs today. Bob pointed this out and we're three and a half percent unemployment. It's not like when we go much higher than four and a half or 5%, My gosh, that'd be a big move. So this is not like what we saw in oh eight where you've got 10% unemployment. But at the end of the day, as Bob said, this is an important part of the cycle. Recessions are necessary to prune the economy of excesses. And it's just unfortunate. But yes, how you treat people when you go through this process is indicative of whether or not you're following the Lord.
John Coleman: And I want to pivot back to this idea of inflation and recession in a moment, which you guys are starting to talk to you. One thing I add, Bob, that I just saw today, to reaffirm this idea that you can use variable compensation reductions or comp reductions instead of layoffs, was Intel actually took that approach today where they announced 5 to 25% compensation cuts across the board, depending on seniority, which presumably helps them manage this downturn that they're in specifically in the economy's in without having to enact such dramatic layoffs. And that can certainly be a tool that companies utilize. I want to pick up now on this idea of recession and inflation. We talked about six months ago. At the time, inflation was running very hot and there were very few signs that we were in a recession. Now inflation is cooling and there are more signs of a potential recession or that we might be in a recession. What is your read on inflation and recession right now? What do you think is ahead for the Federal Reserve? And David, perhaps we could start with you.
David Spika: The Fed met today. We heard from Chairman Powell. He was very clear that they still have a 2% target for core inflation. We're a long way from 2% on core inflation. Given that and given how strong the job market is, the Fed has to continue to tighten financial conditions. And one of the problems they have today is that the market is not helping them. So stocks are up eight or 9% since November and the ten year Treasury is down 72 basis points in the same period of time. That's loosening financial conditions. The markets rallying today on the Fed's remarks, I guess presumable because they only raised 25 basis points. Bottom line is the Fed has work to do. Chairman Powell was very clear on that. His reputation, his legacy is on the line. And the only way we can get inflation under control is by reducing consumer spending. And the only way we can reduce consumer spending on a sustainable basis is by bringing employment levels down, increasing the unemployment rate. It's just how things work. And historically, inflation has only been tamed through recession. So we fully expect a recession at some point, maybe in the second half of this year going into next year.
Bob Dole: So I 1,000% agree with David. So let me just say a few things to emphasize that maybe a couple of different ways. I want to emphasize David's first point. The Fed's target is 2%. We are a long way from 2%. So if the Fed insists on 2%, I do not see, as David said, how we avoid a recession. It may be a mild one for a bunch of reasons, but avoiding a recession is really difficult now. The other path the Fed could choose is to say at some point, you know, maybe two's not the right number, maybe three. Okay. And if we get to a three handle, say three and three quarters, they might say, oh, let's round it down to three. And if they do that, we could have the proverbial soft landing, but their credibility will be shot. And David's right. You don't bring inflation down without cooling the economy, especially the labor market, which shows lots of signs of being pretty strong. So kind of the slide I'm envisioning I put together in December was 50% chance of a mild recession, 30% chance of a soft landing, 20% chance of a more average or more difficult recession. I don't see how we avoid it. We could debate when it's going to start, but the markets acting like, okay, maybe inflation is not a problem because we're bringing it down. Maybe the Fed's almost done. Maybe the economy's okay, let me go out and buy high beta stocks. It may not have a whole lot of quality, and I'm not sure how long that can last if in fact, we are going to have a recession.
David Spika: So let me add one more thing to that. Great points, Bob. I agree completely. You might need to get two guys that argue with each other. John, Bob and I are on the same page.
This is way too friendly. Yes,.
This isn't very entertaining is it? So maybe we'll talk football or something later. But we have seen by virtue of Fed policy, the largest decline in the money supply as measured by M2 ever. There is no way that doesn't have a meaningful impact on the economy, regardless of what the Fed sees as their ultimate goal. There is no way you drain that much money out of the system without it having a meaningful impact in the economy.
Bob Dole: At the risk of beating a dead horse. I want to add to that. Yes, the money supply is shrinking. The leading economic indicators have rolled over significantly. We have the most inverted yield curve in 40 years. The PMI is are almost all below 50 here and around many places around the world. And remember, the Fed raised rates, as David said earlier, at the fastest pace in U.S. history except for Paul Volcker. And we know monetary policy operates with long and unpredictable legs. So I think what the Fed did in 2022, we're going to feel the effects of it in 2023. So it will probably both be wrong and the economy will sail forward. But I don't see how we avoid a significant slowdown, if not a recession.
Bob Dole: When they both are wrong. But we can still be friends. Bob, how about that?
Bob Dole: I hear you. I hear you.
John Coleman: Well, let's see if we can spark a little debate with the next one. I wanted to turn to this topic of ESG, and Bob, maybe we can start with you. You know, ESG has been this prominent trend in investment management for some time now. It's close to a third of the assets in the world claim to be ESG in some way. And 2022 mark, one of the first years of sustained pushback against that, notably against BlackRock, which has become kind of the figurehead for the movement in many ways. And there were effectively two sets of pushback on that that were. Prominent one was for many state based institutions, saying, look, actually all that should matter is fiduciary duty. We should not take into account things that we think are unrelated to performance. And then a second set of pushback was just around the values inherent in ESG, saying that those were inherently progressive values or they were values that people disagreed with. People are of different opinions now on what the future of that holds. What is your view on ESG and how Christian should think about ESG or more broadly based values investing in their portfolio?
Bob Dole: So I think what we're discovering is we don't know what ESG is. It's different for almost every investor and every money manager. And that's why, among other reasons, we at cross mark, we never talk about ESG because we don't know what it is. We talk about values based investing, which in our view is a subset of ESG, not a broader concept. And the standard we bring is what is God said? You know, we could talk all day about what we think and how we would like the world to look. We try to say, you know, God in his word gives us some black and he gives us some white and it gives us a lot of gray. And that's why it gave us minds to think through and try to figure those areas out. So I think the ESG moniker is appropriately undergoing scrutiny, confusion. And look, it will take different forms. There is no ESG standard. That's part of the problem. And so I think the debate is going to continue to rage. And a lot of people will say, let me figure out what my values are and let's see if we can manage money that way and get rid of this broad ESG moniker. I know there's some ESG factors that we think are great for values based investing and others where we want to actually reverse the sign. So it's a very confusing subject, but one that we're all trying to wrestle to the ground.
David Spika: Yeah, ESG has become a dirty word because of the association with the climate change agenda. And as Bob said, we at guide stone don't practice ESG. We don't want to get caught up in ESG. What we do is faith based investing. We want to invest in a way that has a positive impact on the kingdom. Only 15% of evangelical Christian investors invest in faith based investments. We want that to grow. We think that a tremendous opportunity to introduce Christians to faith based investing. We know about tithing, but they don't really understand the opportunity or really the obligation they have to invest in a way that honors the Lord. And so there's a big educational process that firms like cross mark and guide stone are in the process of doing and creating and going out and teaching folks about faith based investing about biblical values investing and how it's different than ESG. And I think that's on us to make sure Christians understand they have that opportunity.
John Coleman: Yeah, and we think the same. I think I would agree 100% with both of you. You know, the Bible actually consistently has a lot of commands about how we live our financial lives. It's obvious that God cares about how we steward capital in the Bible and in church history. ESG is a particular set of values. Like you said, Bob, some of which are aligned with biblical values or Christian values, some of which are not. Right. And I think what's incumbent upon us now is for us collectively to develop a more nuanced set of views about what Christian values look like manifested in a portfolio. And David, then to your point, to encourage people who are Christians to take into account their values when they're allocating capital as much of the world already has through ESG investing, but Christians have kind of lagged behind. I think.
David Spika: Amen.
Bob Dole: As David said, it's an educational process. I think we would all agree. Most Christians think about how they earn their money. You know, they're not going to rob a bank every other week to put food on the table. And at the back end, how they spend their money and where they give their money, they give that thought to from the faith. But this in between that and that's investment part. Boy, a lot of people, they're not even aware of that possibility. So it's a fun education process.
John Coleman: So I'm going to pivot us now from a very fine and catchy topic like ESG to a very nerdy topic like bond markets. And David, I figure you might be able to kick us off here. You know, you guys mentioned at the beginning, 1870 was an interesting statistic that I didn't know, but bond markets absolutely got hammered last year. And for the first time in a long time on the other side, fixed income, even money markets are starting to yield again, Right, Because the Fed rates are going up. Even I now see CCD advertised, which I haven't seen since I was a kid, probably be prominent. What is your outlook for fixed income right now and how do you think about that in an investor portfolio in 2023?
David Spika: Well, John, thank you for giving me an opportunity to explore my nerdy side. I don't get to do that as often as I would like. But I will tell you this at guide stone we're big fans of Bonds. Today. We have seen for the first time ever back to back negative total return years for the Barclays Act. Never seen that before. Bonds consistently produced positive returns. Today you can get four and a half percent or more in short term, high quality bonds. Think about it. Most investors, what do they want to earn? A particular retirement? 6% or so. Wow. If I get four and a half percent in the safest part of the market, that's a great opportunity. The thing that happened last year that scared a lot of people off was the rate volatility. As the Fed was raising rates, rates were going crazy. The MOVE index, unlike the VIX, was going crazy and that had a big impact on bond prices. And I think people got scared off a little bit. But we're near the end, close to the end, obviously, of the rate hike cycle. You're already seeing the longer end come down for rates. That's positive for bond investors. So you buy these bonds at some point, you get an opportunity to go further out on the yield curve, benefit from current yields that are the highest we've seen in 15, 20 years and benefit from the capital appreciation that will occur as rates fall when we get into weaker economic times. So we're big fans today and think investors really need to be taking a hard look at the bond market.
Bob Dole: So, John, as you know, I'm an equity investor, so I start with the phrase bonds are boring but boring is but boring is a good thing.
John Coleman: You're breaking David's heart over there. I see him tearing up just a little bit.
Bob Dole: I have to disagree with him once.
David Spika: I've been called a lot worse, Bob, Trust me than boring.
Bob Dole: So to continue with David's history, he'll look back. The last hundred years I focused on the ten year Treasury. 20% of the years you lost money in a ten year Treasury, only 3% of the time Did you lose money two years in a row. Three years in a row. We went back 250 years and there are no three year rates. So I think we can take it to the bank, maybe a little strong, but close to it. That will make a couple of bucks in fixed income this year. So how do we feel about fixed income? Have some. Unlike a year ago when one and a half percent ten year treasuries, it was a place to stay away from 3.5 a whole lot more interesting. And as David said, shorter maturities, you can get four approaching five. So we want to have some. And now the question in bond portfolios having length and duration from the shortest that we ever had to more neutral, now we're playing the credit game with fear and trepidation, but that's part of how we're trying to add a buffer to above the benchmarks.
John Coleman: That's great. Well, Bob, maybe they get back on firm footing with your territory. One of the biggest hits last year was to growth stocks. You mentioned high beta stocks earlier. We saw this in private markets and growth equity and venture as well. You know, 2022 was just brutal for growth equity for growth stocks in markets, at least partially because they had gone up so aggressively over the prior 15 years and even in the last 12 to 24 months. What is your outlook for growth stocks this year and how do you think about venturing growth, equity or even public growth equity in a portfolio?
Bob Dole: So first, to extend your observation last year, to oversimplify it, but not by much long duration, things were the worst place to be. When interest rates go up, the last thing you want to own is a long duration bond. When interest rates go up, the last thing you want to own is a long duration stocks, and those stocks got absolutely pummeled. Doesn't mean they're bad companies, a lot of good companies. But their stocks just got crunched because the discount rate went up as as interest rates went up. So fast forward to today and then back to my observation, how much value beat growth last year. So we want some of both in our portfolio. You put a gun to my head. I think value will be growth again this year for a whole bunch of reasons. But in the portfolios I manage, I want some value. I want it to be higher quality, predictable value given the economic landscape that Dave and I just posited for this year. But I want some girls too. I just don't want to pay ridiculous prices, so maybe growth more at a price to get some balance in my portfolio.
John Coleman: David, this is your chance to get a little revenge for that boring comment. What do you think?
David Spika: Yeah, I'm still thinking about that one, so I'm going to be a little bit off the Bob train. We like growth and let me tell you why. Growth stocks, as Bob very articulately described, do better in a stable to falling interest rate environment because they're longer duration assets. We believe we're going to have a stable to falling interest rate environment this year. Secondly, investors pay up for growth when growth becomes scarce. And we believe that the economy is going to slow down earnings. Growth has already started to slow down. Growth will become scarce, so investors will pay out for growth. And finally, for long term investors, which I hope we all are for buying equities growth companies is where you get innovation, right. And you talked about venture capital and you talked about private equity. Obviously, you've got to be a long term investor because you can't even get your capital for ten or 15 years out of those. But that's where the innovation comes in. So to have a portion of your portfolio in those types of companies is really going to benefit you longer term and give you the opportunity, invest in really exciting parts of the economy, whether it's AI and machine learning or whatever the case may be, that you can only access through growth stocks.
John Coleman: Yeah, it's only a matter of time before we're just using chatGPT, I think, for this podcast. So there is a lot of excitement.
David Spika: You could get rid off Bob and I and AI is going to be making up better stuff and we have.
John Coleman: Right, they might keep you, but my job is definitely in jeopardy here. You know, Bob, maybe pivot back to you and let you start. You do these ten predictions every year that are fascinating. I'm not going to ask you for quite that many, but to almost round us out today before we come to some lessons you're getting through scripture right now. I wanted to get each of you just to give me your three best predictions for 2023. Bob, what do you think?
Bob Dole: Because you prepped as I looked through my ten and I singled out three. If singled out means three, I don't know. But it is. Inflation falls substantially this year but does not get down to the Fed target. So good news but not good enough news. Two earnings falls short of expectations. We talked about earnings recession earlier. You know the number for the 2023 S&P 500 peaked at over $250 a few months ago, is now in the two twenties. I'm going to get down to $200 and three. The average equity manager beats the index this year, while last year, after eight years where more than 50% of managers lagged the benchmark. I think this will be the second year in a row, and there are a whole lot of reasons when interest rates are stable, when they've gone up, when interest rates are more market set rather than artificially set fundamental research matters. And so that's the third one.
David Spika: Well, John, let me give you my three. I'm going to say the Fed takes the Fed funds rate to at least 5%, Stay it to the end of the year, and that pushes the economy into recession. Secondly, I think bonds beat stocks this year. And thirdly, I'm taking the chiefs over the Eagles in the Super Bowl. Sorry, Bob.
John Coleman: There we go, we got Mahomes guy here.
David Spika: Hey, Patrick. Mahomes is my guy. Okay.
John Coleman: So I'm worried about that. I'm worried about the ankle.
John Coleman: David, He looked okay, but that ankle's making me nervous a little bit that I'd have to pick the Chiefs as well. Bob, you're a little surrounded at the moment
David Spika: I'm outnumbered. We'll talk. We'll talk two Mondays from now, guys.
David Spika: Yes, we will.
John Coleman: Well, hey, this is the Faith Driven Investor podcast and the Faith Part of that's really important. Y'all have touched on that a bit. But we do like to just in the podcast asking each of our participants about what they're learning from Scripture right now that they think might be relevant to others. And David, if I could start with you, just be curious. Anything in your personal devotional life that you're learning right now that you want to share with others?
David Spika: I love this question, John. Thanks for asking. In our small group, we've been studying the life of David, and one of the things that really stands out about David is even though he was anointed by God to be the king of Israel, he didn't try and force it. He didn't try and overtake Saul. He had chances to go and take over and to kill Saul and become king. But he didn't because God wasn't ready for him to do that. So he showed patience, he showed humility, He showed obedience to God, and he waited until God was ready to put him in the throne. And I think that's a great lesson for us to learn in this business, particularly in an environment like this. Let's don't try and get ahead of things. Let's make sure that we're doing what honors the Lord every day, practice that humility, practice that patience and truly honor him and do what's in the best interest of our clients.
John Coleman: Bob, what about you? What are you learning right now?
Bob Dole: Yeah, mine's a simple one. God is sovereign. I mean, we know that factually, and I would say experientially, I'm just grabbing a hold of that and apply it. Some of the things we've talked about the economy, layoffs, people are going to lose their job and that's not fun. But, you know, God knew that was going to happen because he's sovereign over all things, all people at all times. And so I take comfort in that on the good days in the not so good days, that we can look to him as the God who wants the best for each of us. And if we accept his sovereignty in recognizing he has our best in mind, the days get a whole lot easier to live.
John Coleman: Amen. Amen to both of you on that one. And certainly, Bob, that sense of trust and. Sense that there is someone who cares about us and that we can take a very, very long term perspective with regards to our salvation. And also how all these things are going to work out is quite comforting in times like this. This is Bob Dole, CEO of Cross Smart Global Investments. David, Speaker, President and CEO of Guide Stone Capital Management. Gentlemen, as always, incredible insights. We're really grateful to you for sharing them and they've been a great benefit to us today on the Faith Driven Investor podcast. Thank you very much.
David Spika: Thank you, John. Enjoyed it.
Bob Dole: The privilege.