Hot Topic Investor Q&A | Q2 2023

CIO Robert Zuccaro addresses hot topics around potential recession, a stock market crash, the debt ceiling, and why investors should rethink keeping assets in cash.


Welcome to the Golden Eagle Eye - Eye on the Stock Market segment featuring macroeconomic and stock market commentary. We have Robert Zuccaro with us, Founder & CIO of Golden Eagle Strategies. Today Robert shares his latest commentary.

Q: Consumers are starting to push back against corporations who are raising prices too high, and investors are concerned about companies which are simply raising prices versus creating long-term value. What's your take on this, Robert?

Robert: Well, the answer is yes, it's true, and no, it's untrue in certain areas of the economy, like travel, for example, and luxury goods. Consumers are spending very heavily in things like staples, soap, cereal, and food. They're cutting back not only buying less, but they are also substituting high price items with low price items.

If investors are concerned about companies which are simply raising prices and not creating long-term value, their concern is misplaced. If companies did not protect their margins and protect their profits, profits would go lower and as profits go lower. The prices of the stocks would probably follow them.

So instead of being concerned, they ought to be jumping for joy because businesses today are being managed better than any time before in history. 

(00:00 - 02:06)

Q: Many of the headlines warn of an impending recession and stock market crash. Even Warren Buffet predicts a downturn is coming. Should investors be concerned?

Robert: I think not. We are already going through a downturn as real GDP in the first quarter, reported at growth rate of 1.1% as declined from the 2.6% rate in the fourth quarter. And unfortunately in the investment business, most market forecasts focus on their here or now. We're not taking into account that the stock market is a discounting mechanism, which discounts economic activity anywhere from 3 to 11 months in advance.

I think the stock market is starting to look forward to better prospects in 2024, and that's why there has been a strong recovery off the lows by the S&P 500 Index, by the NASDAQ Composite, and also by the Golden Eagle Aggressive Growth Fund Index, which in the past two cycles has led the way to higher stock prices.

Q: So, Robert, I was recently reading an article on Business Insider titled Stock Market Crash Recession is a Done Deal We'll Destroy Profits. What's your take?

Robert: I think not one of those clauses in a statement is accurate. We will not have a stock market crash because the economy will not crash.

On profits destruction that occurred in 2008, where corporate profits dropped 40% in one year. It also occurred in 2020 during the pandemic year where corporate profits dropped 15%. We will have a slowdown. No question about it, but the damage to corporate profits in this cycle will be a lot less than took place in 2008 and 2020. First quarter profits were projected to be down 5% with 70% of S&P companies reporting.

They were down 3%. Any profit shortfall in the year of 2023 will be held to single digit levels, and that certainly does not qualify as profits destruction.

(02:07 - 05:26)

Q: The current standoff on the debt ceiling is rattling investors. NBC recently reported that the debt limit debate endangers already fragile US economic outlook and goes on to say that as the nation barrels toward a June 1 deadline to find a resolution, economists and Market Watchers say the stakes have spiked, borrowing costs, omitted tanking stock market. Should we be concerned?

Robert: Despite the drama, both parties will reach an agreement. They always have. They understand the implications of default on American debt, and all that is being played out is a game of chicken little, and it's only a matter of who blinks first, but a deal will be done by June 1st.

If it's not done by June 1st, which may be an artificial deadline, the deadline beyond that may be several weeks out, but there will be a deal consummated in order to raise the national debt. Investors are always rattled in bear markets and they become so rattled they cannot see the next bull market unfolding.

In 2020, during the pandemic, investors created some of the highest cash positions in memory by selling out of their holdings. By June 30th of that year, investors were only 15% invested in their equity positions. By June 30th of that year, the S&P had recovered 38%. 

Two months later in August, investors for the most part, were still underweight in equities by more than 50%, and the stock market was trading at an all-time high. This is never gonna change. Investors are carrying their heaviest cash positions now. The S&P is up 16%. The NASDAQ is up 19%. And the Golden Eagle Aggressive Growth Index is leading all indexes because through yesterday's close it is up 24%.

Once again, the train has left the station, but there are a few people on this train.

(05:27 - 08:38)

Q: If you're reading the news, you can't miss the theme, urging investors to stockpile cash. In particular, people are concerned that the stock market is set to decline if the Fed pauses interest rate hikes, what's your take on how a pause in rate hikes will impact the stock market and should investors be keeping their assets in cash? 

Robert: Rates never really affect the stock market long term. If you go back to 1940, for example, And long-term governing bonds were yielding 1%. 40 years later, at the conclusion of 1980, bonds were yielding 17%. How did bonds doing in this inflationary environment? The CPI value of $1 went to $6. The dollar equivalent of a $1 investment in long term bonds only went up to $2 and 50 cents.

However, that same dollar invested in the S&P 500 starting in 1940 grew to an equivalent value of $78 by 1980. So I really feel to comprehend how we can say that inflation and high interest rates are bided for the stock market in looking at the secular trend of dramatically higher rates during the period starting 1940 and ending 1980.

Q: So, Robert, you said, and I think this is the key here, that it doesn't impact the market long term. So how should investors deal with the current market volatility in light of the fact that these interest rates do create a reaction in the market?

Robert: Unfortunately, the new services do a disservice to investors because they're scared of them.

Investors sell at the bottom, they buy at the top. It's a repetitive process, and there are many brokerages out there that are issuing these short-term forecast. For example, three major prominent banks, Morgan Stanley, Goldman Sachs, and Bank of America through its Merrill Lynch arm. Or very negative on the stock market, which has forced people to sell their stocks.

The worst thing you can do as an investor is to sell your stocks at any point in time. I'll give you one example if Iris were available, but let's say we have a simple tax exempt retirement program, which we started in 1978, and we contributed $5,000 a year through the end of 2021. That total investment over that 45 year period amounted to.

$220,000. If you made a $5,000 investment in every one of those years and you never went to cash, that investment would've grown to $5.3 million invested in the S&P 500 index over that full year period. So who needs cash? If you invest in the stock market, you only invest if you are a long-term investor, and that long-term time horizon should not be less than 10 years, preferably a lot longer, 10 years.

Albert Einstein said the eighth wonder of the world is a compounding of interest, which that example of attacks. Exempt investment from 1978 through the end of 2021 demonstrates.

(08:39 - 13:13)

Q: Investors cite the weakening of the US dollar as a potential factor that will drag down the stock market. How do you see a weakening dollar impacting the market?

Robert: If anything, a weak dollar is positive because imports become cheaper and multinational earnings, which are translated back into dollars means more profits. Approximately 40% of S&P 500 products are comprised by foreign earnings. So as this money is transferred back on a book basis to the US, that means foreign subsidiaries are making more money.

They get an artificial boost because more money gets transferred back into dollars when the dollar is weaker than it is now. Thus, if foreign earnings go up, S& P earnings go up, and if that happens, it should lead to higher security prices.

(13:14 - 15:03)

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This transcript was generated by software and may not accurately reflect exactly what was said.

Please note, that the thoughts expressed in this podcast are those of the presenter. This is not, nor should it be considered an offer or a solicitation of an offer for investment.

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Hot Topic Investor Q&A | Q2 2023

CIO Robert Zuccaro addresses hot topics around potential recession, a stock market crash, the debt ceiling, and why investors should rethink keeping assets in cash.

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