Video Transcript:
Rick Walker 0:07
Well, hello, everyone. Welcome to the podcast. I am so excited to have Bob Doll with us today. Bob is presently the Chief Investment Officer at Crossmark Global. Bob joined Crossmark in May of 2021 as Chief Investment Officer bringing over 40 years of industry experience to guide their investment process. He utilizes his investment expertise to provide weekly and quarterly investment commentaries as well as annual market predictions. You’ve probably seen Bob as a regular guest and contributor to multiple media outlets such as CNBC, Bloomberg TV, Moneywise, and Fox Business News. Prior to running Crossmark, Bob held the roles of Senior Portfolio Manager and Chief Equity Strategist at Nuveen and Blackrock President and Chief Investment Officer at Merrill Lynch investment managers and Chief Investment Officer at Oppenheimer Funds. Bob is joining us from Princeton, New Jersey, obviously, the storied place founded by the Quakers at home, too, of course, Princeton University. Before we pressed the record button, Bob and I were remarking about Princeton being the hometown of the Presidents, obviously, Woodrow Wilson, one of the story presidents of Princeton University, Jonathan Edwards. Famously, enough was, I believe, a president at Princeton for a couple of months before he passed, and obviously, the home of Albert Einstein and the place of the story, Washington’s defeat over the Brits there in Princeton. So Bob is joining us from a legendary place. Welcome, Bob.
Bob Doll 1:30
Thank you, Rick. Great to be with you.
Rick Walker 1:32
Great, well, great to have you. I appreciate you taking some time to join us. I wanted to hand it off to you right off the bat because there’s a lot of activity that’s been happening over the past quarter, especially in the general markets, both globally and localized to the United States. And so, I’d like to hand this off to you to cover the ten predictions that you make every year and give us a Q1 update. And afterwards, if we have time, I would love to have some Q&A with you whenever you get a chance.
Bob Doll 1:58
Sounds like a plan. I look forward to it. So I’ve got a bunch of slides, Rick, as you saw, and folks, great to have a few minutes to try to, from one man’s point of view, explain the environment in which we find ourselves. I’m going to do that via the slides here. And as Rick mentioned, via the ten predictions. Here’s a good introductory slide. It takes a look at the US stock market via the s&p 500 from the end of 2019. So 20, the pandemic year 21, the recovery year 22, the bear market, and for the first three months of 23, off to the left, you see that decline. That was Coronavirus, it was not a fun period, but it didn’t last long. And with 2020 hindsight, it wasn’t that deep compared to the massive bull market followed. Look at that rise nonstop for almost a two-year period where stocks in the US more than doubled. What caused that big run to the upside? The answer is money. That’s important because the absence of money, if you will, is part of the problem we have today. When the authorities couldn’t spell Coronavirus. They said what are we gonna do? And we have to prevent a catastrophe, and they do what they typically do when they don’t know what to do: throw money at the problem. The Fed lowered rates to zero provided all kinds of other facilities. Congress, of course, passed five, counting five multi-trillion dollar bills. You know, we used to joke with the Fed ever dropped money out of helicopters onto the American public? And the answer is no. They passed that with copters and went right to B 52. Bombers. Boy, did they dump the money on the system. And money always goes to the easiest place first, the financial markets, so stocks and bonds absolutely soared as we turn the calendar into 2022. We had a bit of a hangover almost from day one. And you know what happened thereafter? Fact: The first half of 2022 was the first six-month period in US history where stocks went down more than 20% while simultaneously earnings estimates went higher. Was not about earnings. Was not about the economy. It was about valuation. Stocks were selling at well over 20 times earnings entering 2022, perhaps appropriate for a zero interest rate and inflation environment. And zero, you know what I mean when I say that 0-1-2. But not appropriate for an inflation rate that was already moving noticeably higher. And interest rates were about to move higher. The second half of last year was very different from the first half. It was volatile, but it was actually up marginally. I need a magnifying glass to see it. And, of course, so far in 2023, stocks are up a bit as well. Although the average stock is not nearly what the favored few are. In fact, if you look at the first quarter, where stocks were up 50 plus percent of the game was accounted for by three stocks, Microsoft, Apple, and Nvidia 90 plus percent of the return was ten stocks because that leaves 490 stocks that did virtually nothing. One more comment on this intro perspective slide. Policy errors you see, in the middle of the slide, the history books will be written, I think, feature these three mistakes if I can be a Monday morning quarterback. In January of 2021, just as we were coming out of Coronavirus and the world was beginning to improve, we witnessed a government that basically said we’re not going to sell any more land for oil. We’re going to cancel a pipeline. And we’re going to curtail drilling on the land that’s already been sold for that purpose. We were in an environment where oil demand was going up, and the government curtailed supply. And you know what the result is? Economics 101 price goes up. The oil prices would go up was no mystery. One of the easiest calls in my career was to own oil stocks. Second was, and I’ve already hinted to this excess monetary stimulus, I wrote to everybody new in Washington of any authority after the first $2 trillion bills and said guys, take a pause, wait and see what the impact of this big influx of money will have before you do more. Of course, they did, the more which led to inflation. And then the third error was denying inflation was a problem for months and months. So that’s a little history. This is where we are. I hope that’s a good perspective to get into where we are and where we’re going. Our theme for this year, as the Fed calls the shots, the Fed has said we’re gonna get inflation down to 2 percent. If they’re serious about that, we cannot escape a recession. Inflation has moved down. Yes, from nine to, let’s call it, five, but it’s nowhere near two. If the Fed wants to, they have a lot more surgery to do. Another choice they have is to, I call it, blink and say, you know, maybe two isn’t necessary about three and a fraction. If we do that, that will lose a lot of credibility, we could have a soft landing in our economy. And in the meantime, the Feds trying to thread the needle, that is, deal with the financial consequences of the banking problems we’ve witnessed recently while making sure inflation comes down while making sure the economy is okay. And they are not an easy balancing act. I won’t spend a lot of time on the banking crisis. But for your reading pleasure, I’ve tried to list here, kind of what’s happened. And all I want to mention is the very first bullet point. There are consequences to raising interest rates from zero to probably later today 5 percent in a year. Yeah, we’ve had a couple of bank failures. But to think that the most significant quickest rise of interest rates in modern history goes with just those consequences is, I think, naive. We have more banks that have more problems. And we have an economy that has not yet significantly felt the impact of that change. There are more to come. And as a result, we think we’re going to have recession. Now to our defense, last year, we found ourselves defending no recession call. A lot of people said we were going to have a recession. Actually, many thought with the first two quarters of 2022 negative in GDP, we had a recession. We didn’t have a recession. It takes a broad and sustained move down and real final demand consumption, capital expenditures, not inventory adjustments or foreign trade. There are so many leading economic indicators that tell us when we might have a recession, and most of them are flashing red lights, the inverted yield curve, the decline in money, the leading economic indicators themselves down a record 12 months in a row. Hence, we think we’re going to have recession. When’s it going to start? I have no clue. No one does. I’ve been saying all along, probably by Labor Day of this year. Now, at the same time we think if we get one, it’s going to be a mild recession. Three reasons why. One the health of the US consumer, lots of cash on their balance sheets. Two corporate America, their balance sheets are in good shape, and their profit margins, while under pressure, are still pretty healthy. And third, despite the asset-liability mismatch that has caused some of these banking problems, the banking systems balance sheet are actually in pretty good shape. You go back and look at prior to other recessions, what the bank balance sheets look like a lot worse than they are today. So recession, probably yes. But hopefully, and probably not a very deep one. Here is a picture of some of the things I just referenced the yield curve, the top graph here, you can see it’s negative, it’s inverted, long term rates are lower than short-term rates, which, as you can see on this slide before the gray areas is a pretty good lead indicator that we’re going to get a recession there those lead indicators bottom left and the money problem that I mentioned to the right. After throwing so much money in the system, that’s the big upward move. Then the big downward move is the contraction of that money. We look at a lot of things, as you probably do as well. One of them Is the purchasing manager index series. This happens to be manufacturing. And when this number is above 50, the economy is expanding when the number is under 50. The economy is contracting, and look at that right-hand column, mostly below 50 numbers. So as an economist, which I am not, I’m a portfolio manager. I should have mentioned when Rick gave that kind introduction. I don’t spend my time talking about markets. I spend my time managing money for individuals and institutions for Crossmark. Out of that come our macro thoughts. So with that in view, what I’ve just described as a mild recession scenario, we give that a 50 percent probability of a more difficult or average recession 20 and the hope for a proverbial soft landing 30. Inflation, I mentioned it before, let me hone in on a bit. There is a little history of inflation. For years like a whole decade, we didn’t talk about inflation because it essentially didn’t exist. It was, to be precise, prior to last year for the prior ten years, an average of 1.2 percent. So call it zero to 2 percent. And then it ratcheted higher for the reasons we mentioned before: too much money chasing too few goods to 9 percent. At year-end, when we made this slide down to six to seven. We’re currently in the fives. Our view is with what’s already been done. We’re gonna go a little lower, call it four, but nowhere near that two that the Fed is insisting upon. The left-hand half of this slide is the core PC that’s the Fed’s favorite inflation gauge, and you see it’s come off the peak but a long way from that proverbial 2 percent. And to complicate matters off to the right, you see how services inflation moved up while goods inflation has rolled over, only complicating the Feds problem, the rate set by the central bank in the United States called the Fed funds rate we predicted beginning of the year contrary to the consensus that it would reach 5 percent. Curiously, if they go 25, as we make this recording later today, we’ll be at 5 percent and likely to stay there for the balance of the year, which is different from the consensus, many of you that the Fed in the back half of this year will begin to lower rates, it’s kind of well raise rates will raise rates will get to a level as they were only kidding. And they take them back down. I don’t think so. We think there’s a lot of work to be done in the US from the Fed’s point of view. And there is this slide shows a lot more work needed to be done overseas. Earnings, last year, as I mentioned, it was about valuations too high. They had to come down for stocks and bonds, and they did this year. The problem, in our view, is earnings. If you let me key on calendar 2023 S&P 500 earnings, that’s the green mark bar on the right. Those earnings peaked actually $252 a share, estimated for 23 last summer. By year-end, we were down to 230. We’re down to 220. As we speak, our guest, as you can see, is when all is said and done. It’ll be 200 earnings estimates are still too high first-quarter earnings parenthetically have come in better than expected. But the analysts, you would think if they’re better to expect to be taking their full-year numbers up, and they’re not. Why? Because they know their numbers are too high. Number five, and rather unusual prediction, is that stocks, bonds, and cash all have a docile sort of year, no major asset class up or down more than 10 percent. And that may sound like an easy prediction to make. But it’s actually only happened about 20 percent of the time. Eighty percent of the time, one of those assets, usually stocks, are up or down by more than 10 percent. The notion here is we’re going to frustrate, as we have here today, both the bulls and the bears first six weeks of this year. Market went straight up, the bears said what’s going on, and the next six or so weeks, stocks went down and the bullish they want to happen now of late. We’ve had a bit of a run to the upside, and we’re getting sort of this sloppy trading range. So our view is that the S&P 500 will end the year at around 3930, which is a bit below where we are today. If so, it’d be a frustration of the bulls or the bears. Notice in the bottom reminder. Stocks have never bottomed before a recession started. The stock market bottomed last October. If that was the bear market low, it might mean we’re not going to have a recession. But if we are going to have a recession, we probably have to go down and test those levels and break them, which would be 35/3600 on the S&P for the less initiated. This is a perfect schematic, and so I took it from our friends that will free search bear markets our process inflation goes up. The Fed raises rates, valuations fall, the economy slows, earnings estimates get our cut, and we have a bump in the night. That was a banking failures. This is exactly what’s happened in the last 12 months or so. The question is, does this continue? Do we have a recession causing a bottom in the stock market, the Fed turns around, lowers rates, and we get a new bull market? Stocks will go up again, promises. Here’s the evidence, the stocks have never bottomed before a recession. You see that next and last column? Did the market make it slow in the recession? Yes, yes, yes, yes, yes, with one exception, and that exception stocks made their low after the recession, not before it. Valuation is another way to look at things or the PE ratio in the stock market relative to inflation. Price-earnings ratio on the stock market today on trailing earnings is over 20 times. That happens when inflation is near zero. But if inflation is for that, PE should be more like 16. Stocks, in our view, are a little on the expensive side. Couple of words about bonds. If you bought a ten-year treasury bond on January 1 and sold it on December 31, 20 percent of the time, you have lost money. How often did that happen? Two years in a row like it did in 2021 and 2022. Only 3 percent of the time, begging the question, How often did that happen? Three years in a row? The answer going back 250 years is never. Does that mean we can take it to the bank? Are we going to make some money in bonds this year? I sure hope so. So what are we doing in our bond portfolios? We have raised from the lowest ever in first quarter of last year maturity and duration in our portfolio that out toward duration neutral, meaning our maturities and our durations are not too dissimilar from our benchmark where a lot of selectivity around credit given we expect a recession to happen. If tax conditions are appropriate, munis are pretty attractive. This is my long-term sad present the information slide. What this shows you in red is the yield on the ten-year treasury over the last bunch of decades in blue is the inflation rate. Note with me how we had that big peak in the 1980s. That was the Paul Volcker-era chair of the Fed. He slayed inflation, which is a lot worse than it is today. He gave us two recessions to get there. But he set off a 40-year disinflation process where interest rates and inflation made lower highs and lower lows that ended in August of the year 2000. In the middle of the pandemic, when the ten-year Treasury yield got down to 52 basis points, one-half of 1%, I don’t believe any of us will ever see that level, again, doesn’t mean rates of inflation going straight up. It just means the easy money was made in the last 40 years. I know. I’ve been managing money for 40 years, and I bought a lot of bad stocks. But I often got bailed out because as rates went down, the valuation on the stock went up, even if it wasn’t doing all that well. Now to make money for my clients, I got to be in the right stocks and avoid the wrong stocks. Sectors this prediction we are getting so far this year. Very wrong. We have a long-term average of 72 percent accuracy. But this one is going to take a lot of surgery to get it right. Energy stocks have not been good, financials have been awful. And technology has been good. We’ve got them on the wrong side of the ledger. But a couple of comments about those three energy stocks last year ignored the bear market. Had a correction in the first quarter. We think these stocks are pretty cheap. As I’ll show you on a slide in a second. Financials, their balance sheets are in good shape. So once we get through this asset-liability mismatch, we will be taking higher positions. We’re already starting to nibble on them. And technology, they’re still expensive, especially with the rally so far this year. And there are a lot of cyclical earnings that we think will be under some pressure. Here’s the evidence that I mentioned earlier, the first-row energy makes up 11 percent of the earnings of the US stock market but only five 4.9 to be precise percent of the capitalization. So I get double the earnings as I do for what I have to pay for these stocks. Technology is the opposite 21 percent of the earnings but 26 percent of the capitalization. So liking energy and being cautious on technology makes sense fundamentally just hadn’t so far this year. Number seven, there’s a lot of consternation among managers and investors about index funds or passive investments versus active products. I manage active products at Crossmark, both active and passive. So there’s no bias here other than to try to help investors think through it. The last eight years, you can see off to the right passive outperformed the average active manager. That’s why the index fund was so popular. Go back a couple of decades, and for eight years, it was just the opposite actually, by a wider margin. I’ve gone back to 1926, when the S&P 500 was created, and looked at each year. It’s about 5050. There are conditions when in place. Active beats passive and vice versa on the other side. One of the key ones is interest rates. If interest rates are artificially set at zero, which they were for a decade. That’s tough going for an active manager conversely when they are more reasonable as they are today. Active managers tend to do better, we believe, as we did last year, and thankfully got it right international stocks were outperforming the US, we find a lot of Americans have almost all their money in the US. And as you can see in the bottom left, that’s been the exactly the right thing to do for the last ten years. Until last year, you didn’t want to have your money anywhere in equities last year. But if you had them internationally, you lost a lot less money than you earned in the US. And while the year is only into April, International is, again, beating the US for a bunch of reasons, among which near term is God gave Europe a pretty mild winter. So the energy price and shortage fears have dissipated. And China is reopening post the COVID zero policy. And that’s given international stock a move to the upside. Number nine is the geographic comment, a longer-term prediction but one that we think needs to be paid attention to. It basically says we Americans talk about the US. And then we have a few minutes we talked about China, China, China. Our view is don’t ignore China. But please add India to your commentary. India, believe it or not, has already passed China as the world’s largest population, and happened early this year. In fact, demographers argue that China’s population by the end of this century is likely to be not a whole lot more than half of what it was at the peak. China lost 850,000 people last year. Why the one-birth policy? While it’s no longer in force, it became a way of life and show, so Chinese population tends to marry later if they get married and have one, maybe two kids. And so that population will shrink. By the way, most of the developed world has that same problem. US population will, for the same reasons, probably peak out here in the next 12 to 15 years because people are not getting married or getting married later or having fewer kids. But India is coming on strong. As you can see with the growth rate numbers on the right-hand side for 2024 as well as for the next ten years. So pay attention to India is our point. Number ten is always a political prediction. And so the one we made is that a double-digit number of candidates announced for President, we’re up to six. We need four more to get this right. More important than that. Let me point out a couple of things Washington DC related off to the right here you see globalization, that’s when each country does what it does best, makes and sells what it does. It’s called global trade or free trade. You can see that that’s flattened out. Countries have become far more domestically minded. Nationalistic, populist they are the words that go with it. And so, globalization has stopped being a source of growth for planet Earth and likely to stay that way for some time. This will slow economic growth. The other Washington DC item is the debt and the deficits of the federal government. I think in my 40 years managing money. The question I’ve gotten most often is this one, what about the debt deficits of the United States, and my view has been when it is a free lunch, we are eating it year after year, and we will eventually have to pay the piper. But until last year, I said, but not now. Why? Because interest rates were falling faster than the debt was going up. As a result, interest expense, the product of those two things, was falling as a percentage of the federal budget as a percentage of GDP. That’s why nobody talked about it. And that’s why it wasn’t an issue. But now, debt still going up. That’s not a change, but interest rates have gone up. And so, interest expense is becoming a big deal. It is time to pay the piper, and there are consequences. I’ve listed five, on the left, over the years to come. We’re going to hear more and more about this debt issue as time goes by. So let me start pulling this together, make a few concluding comments, and then we’ll see if Rick has a few questions. I’ve covered much of this, but let’s be complete and make sure we’re all on the same page. And you may disagree with what I’m saying here, but I want to be clear. One, the US economy is slowing and is likely to slow each quarter this year by year, and we expect a recession, a mild one, to have started. Three, we think the Fed will raise interest rates one more time this day May third and then keep rates flat for the rest of the year. Four, we think inflation will continue to fall but not get anywhere close to the 2 percent Fed target. Five earnings estimates are still too high even if we don’t have a recession. Six, we expect bonds to be in a trading range with some credit spread widening if in fact, we have recession. Seven again if we have a recession, we expect to breach the October low for a brief period of time. Eight International to outperform the US. Nine when the year is said and done. We think both the bulls and the bears will be frustrated. And they get their way for a few weeks. And then the other side is heard from as we bounced around covering thousands and thousands of Dow Jones industrial average points, but really not going anywhere. And finally at number ten and we didn’t talk about this a lot. So let me make a comment. The world is never a safe place, but it’s extra unsafe in our view. Case in point Saudi Arabia, six months ago, great friend of the United States, now cozying up to China, and we can give lots of those kinds of hotspot changes that should cause Americans to be somewhat concerned. So if you’re an investor and you agree with what I’ve said, what do you do about it? Basically, I’m giving you this is what I’m doing with my portfolios. One, I’m expecting choppy markets. I am more reactionary as an investor than usual, meaning I’m buying the dips and trimming the rallies and individual stocks in industries and sectors in the market as a whole. I’m gonna let the market come to me. Stocks that I want to buy, I’m gonna have a price target. It’s below the market. And if they get there, I’m doing some buying and vice versa for names that I want exited from the portfolio. Two cash flow, quality, predictability of earnings absolutely key in a sluggish economic environment. Three, unlike a year ago, when we had the yellow have not red flag up on bonds when the ten-year Treasury had a yield at its low of one and a half percent. We said have as few bonds as you possibly can. We’ve changed our tune. There’s a three-and-a-half yield on the ten-year Treasury owns and bonds. Four, do some diversification. In an uncertain world. Diversification makes sense. Somebody said to me if you’re not dissatisfied with some piece of your portfolio, you’re probably not adequately diversified. Five, quality value and less expensive growth, the style question growth versus value inevitably comes up in conversations. I want a little of both. But on the value side, I don’t just want cheap stocks. I want ones that have high quality, good cash flow. Growth, I’m just going to be stingy about how much I’m going to pay for. Six, consider an absolute return strategy to complement your market exposures. I have the privilege, for example, of managing an equity market-neutral fund. There are several of them out there and other absolute return products, products that have low correlation with the stock and bond market. And number seven, the old adage is don’t fight the Fed and don’t fight the tape. This is what we do at Crossmark. We manage 34 strategies, 22 stock strategies, seven bonds strategies. And the five in the middle are combinations of things on the left on the right. The ones that are in bold are the ones that I have the privilege of managing all large-cap US. So this is for the lawyers. If you have any interest. I sure don’t. So I’m going to move to the Q&A slide. Rick, I hope this has been helpful in some way. Do we have a few minutes for a few questions?
Rick Walker 27:53
Sure. Bob, thanks so much for providing that overview. Yeah, a few follow-up questions. A central theme was the Fed’s involvement in the markets. And they’re very essential to this. And obviously, in the back of their minds, historically, at least since the Bernanke times, this two percent inflation target is really been at the forefront. And I think you had about a 30 percent probability that they might detach a little bit from that. Does that 30 percent probability does that factor in some of the political factors coming into a 2024 election cycle?
Bob Doll 28:20
Yeah, it does. I mean, election cycles create all kinds of sometimes understandable and non-understandable, scratch-your-head periods. And that could be the case, then the Fed supposed to be apolitical and not part of the process? And generally, they are, but it’s hard for them not to be influenced.
Rick Walker 28:38
Sure, sure. And the yield curve inversion, which generally tracks the two against the 10, I think you had a three-month against the tenure on one of the charts that you showed. The two, and the ten have been inverted for about 13 months or so right now, I believe. And if we get into a situation where we have multiple years of inversion, what sort of implications do you see for the markets and maybe potential responses from the investor side?
Bob Doll 29:03
Yeah, first of all, a clarification. The reason we use 90 day ten year rather than two to ten. Is 90 days is far more valuable measure in terms of predicting a recession. The 90-day ten-year went inverted long after the two-year, but having said that, if we have an inverted yield curve from whatever measure using for some time to come, it does mean we’re likely to have very sluggish economic growth, which is not out of the question, Rick over a lot of measures, including the demographic ones I concluded with growth is probably going to be slow.
Rick Walker 29:35
What sort of strategies do you see available to us in the regional bank equity markets right now?
Bob Doll 29:40
So I would not have a direct investment in any regional bank strategy. I own some regional banks in my portfolio. So if you own them, make sure it’s part of a very diversified portfolio. And I would say that about any sector, the regional banks have more balance sheet issues than the big banks, and of course, the regional banks have struggled more than the big banks during this period. If you’re going to key in on a regional bank to own, make sure you have some good, accurate date information on the asset-liability mix, that’s what got these banks into trouble because of interest rates moving up so fast assets fell in value as interest rates went up. And they’ve got caught in the crosshairs of not being able to meet the liability.
Rick Walker 30:26
Any indication historically, based on the long-term values of the larger banks which purchased the struggling banks, for instance, the purchase of Wachovia, Chase’s recent purchase of the most recent bank that failed.
Bob Doll 30:39
FRC
Rick Walker 30:40
Yeah. And are those traditionally good purchase acquisitions? I think Chases’ purchase was of the 16th largest bank in terms of assets, and that may or may not have a major ramification over the long term. But I would imagine they typically get pretty, pretty reasonable deals out of that with backstops.
Bob Doll 30:58
Yeah, for starters, in perspective, I would say the United States still has way too many banks. Most other countries have anywhere from, you know, a couple of dozen to maybe 100. And we still have hundreds of banks in the United States and an environment where technology didn’t exist. You needed all those community banks. They’re just less relevant today. So we’ve had a slow but steady reduction in the number of banks as they’ve merged. Periods like this accelerate that. But to your question, you’re absolutely right. Take the FRC purchased by JPMorgan Chase. You know, the Feds were hoping some bank would buy it. But no banks would step up to do it until the government stepped in and provided some guarantees. And if I were the CEO of the bank, I would insist on that too. Why do you want me to buy this piece of merchandise that’s struggled and hampered and maybe crippled in some way without giving me some guarantee? Once that came? There were several buyers, and JP Morgan Chase one.
Rick Walker 31:59
Excellent, excellent. And one of the things that we watch for the commercial real estate business, one thing we watch is the M2 money supply. And something striking happened back in March, where that year-to-year money supply actually declined by about 4 percent, which is the first time in something like 90 years. Is that a, is the M2 money supply, something we should be watching you reference liquidity in the consumer and the business spaces both being fairly healthy still, what sorts of other indicators should be should we be monitoring to monitor liquidity?
Bob Doll 32:28
Yeah, so M2 is a good one. And you saw I gave a graph of it and showed the, you know, the big move up in the M2 during the Coronavirus period, and post and then the big decline. And as you mentioned, negative year-over-year, that’s a concern of mine, you know, money makes the world go round, as it were. And if it’s being taken out of the system, that liquidity shrinkage just causes strictures in the way of getting things done. So that is a concern. Now there was a brief period during the banking crisis recently where the Feds injected money in the system. So we had a move back up, but it’s beginning to come back down the other side now. So I’d watch carefully the broad money aggregates for liquidity purposes. If that were to get a lot healthier, probability of recession goes down some, but if it stays like it is, that probability of recession remains well over 50 percent.
Rick Walker 33:22
Great, great. And we’ve noticed a lot of the interest rate increases over the past, say, since Q1 of 2021, the hedging fees have increased, and also, the spreads have begun to increase, especially over the last 12 months. And so that’s been a big factor on the debt side business, working capital loans, real estate loans, things like that. And so hopefully, some of those spreads will start to come down a little bit as the Fed ease. A little bit less uncertainty in the market. So we’re predicting May third be the last, the last 2023 bump, hopefully.
Bob Doll 33:48
Yes, that’s for sure. Hopefully, underlying, in capital letters. And as I mentioned earlier, Rick, and as you know, the consensus is that before the year ends, the Fed will be reducing rates two or three times that part we just don’t see unless we’re missing it on inflation. In fact, there is some probability, in my view, after a pause, the Fed realizes inflation is not coming down to where they need it, and they could resume tightening sometime in 2024.
Rick Walker 34:16
Okay, great, great. And final question. Global uncertainty, you saw overnight that there was an assassination attempt on Vladimir Putin with two drones coming out of potentially Ukraine. And you also have on the table the potential on the table for China to invade Taiwan. A couple of big disruptors there that could potentially move the needle on the global statecraft front. What sort of things in the equity market should we be paying attention to if one or two of those sorts of major pins fall?
Bob Doll 34:45
Yeah, for starters, and again, as you know, the stock market tends not to pay much attention to things that have very low probabilities but massive consequences. It reacts after the fact, and most geopolitical items fall into that category. Low probability, but big consequences if we get there. So if one of those two or a myriad of others, you know, oil in the Middle East and a potential war there, North Korea, etc., there’s a long list, as you know, wake up the next day and risk assets will have gone down that includes the stock market. So it’s hard to, it’s hard to for it’s impossible to forecast those things. And it’s hard in advance to position oneself. I say you have a little more diversification, a little more cautiousness, a few more defense stocks, a little more cash, all at the margin relative to what a normal position would be if you’re concerned about geopolitics.
Rick Walker 35:39
That’s great. That’s great. I went back last week and read an article that Sam Zell wrote in, I suppose 84 or 85 in some esoteric magazine, and he essentially predicted the coming of the cash flow model over the over the replacement value in real estate that the move to cap rates and away from the price per square foot and a flight to quality in that space. What you saw happen, but then you saw it retreat a little bit as liquidity. I guess money policies got a little bit more liberal over the past number of years there. And so I was happy to see that that sort of a flight to quality of flight to cash flow was one of your ten steps and ten recommendations. So that was very helpful. Bob, I enjoy reading your weekly Doll’s Deliberations. I downloaded it from the Crossmark website. Is that the best place for folks to find you and subscribe to your deliberations?
Bob Doll 36:26
Yes. And they can sign up for dollars deliberation on our website and check out our product information and see if there’s any interest.
Rick Walker 36:33
Great, great. Well, Bob, thanks so much. And, of course, the website is crossmarkglobal.com. And just a brief note about Crossmark is a faith-based investment management firm that provides a full suite of investment strategies to institutional investors, financial advisors, and clients they serve. Crossmark is especially known for helping its clients align their investments with their values by creating a socially conscious, responsible investment strategies, and you know, just fantastic. I love the mission there, Bob. Appreciate you and everything you guys do over Crossmark, and you know, I appreciate your time and sharing with us and folks. You have the phone number there on the screen. We’ll do it. We’ll do a link to it below this as well how they can reach out to you and Crossmark to learn more.
Unknown Speaker 37:11
Thanks, Rick. Good luck, everybody. Bye. Thanks so much. Appreciate it. Be blessed.
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