Commentary

Market Defies Gloom & Doom Predictions in Q1 2023

The S&P 500 Index advanced 7.5% while the Nasdaq Composite Index shot up 17.0%.

CIO Robert Zuccaro Discusses Stock Market Performance in Q1 2023

I have before me a number of reports. This one says the stock market will drop another 40% as debt crisis hits in over-leveraged economy. This one says and this is recent: millionaire investors haven't been this bearish since 2008. Morgan Stanley says stocks could slump by another 20%. JP Morgan says the market's going to retest the lows of the bear market.

Now, what's really interesting about the investment business is that a lot of people can't see the forest through the trees. The NASDAQ jumped 17% in the first quarter and most people don't want to believe it. I think the market is doing especially well. And what I realized about the strength of this stock market, and I'm talking on a secular basis going out 5 or 10 years. It's a lot stronger than anybody contemplates. We do a lot of work on market cycles, and we update our reports and we've been tracking bull markets and bear markets for the past 25 years. Every so often, every few years, we have to go back and update our work.

And the realization occurred to me that the 2020 bear market was really a phenomenon, which is not really discussed at all from this standpoint. We had the worst quarter of economic activity in the second quarter of 2020 where the economy did not contract, it collapsed. Real GDP in that second quarter dropped by an unprecedented 31.7%. That's been given very little notice but what was remarkable about that bear market, it took place over a period of five weeks which never happened before. Fast forward to 2022, if indeed the bear market is over, this will mean that the 2022 bear market lasted a mere nine months, which is an indication to me of the structural underlying strength of the US stock market. Europe with all of its problems, in February witnessed the UK stock market with its myriad of problems, setting an all-time high. The French stock market did the same thing. So, I think investors are concerned about losing money and we are a little bit different. In fact, we're a lot different than most investors.

When I came into this business, I always thought you come into the investment business to make money but that's not the mindset today. The mindset today, is I want to invest not to lose money. It's like in football. In a football game, you have a prevent defense. And in a prevent defense, I think you're only preventing victories because you set back behind the line of scrimmage, and you let the other team advance down the field. To me the best defense is a good offense, and some people agree with that. Most do not but I've always invested to make money and I've never been afraid to lose money – I don't like it. And the reason is very simple, which nobody talks about, that the bull market is permanent. So, what if the stock market goes down? We've been having bear markets for 200 years.

The worst bear market in history was in the early stages of the United States when Andrew Jackson came into office. It was called the Panic of 1937. The stock market back then was very prescient because it anticipated the panic by turning down before the panic a year and a half earlier, in 1835. But in that bear market, which was severe, 90% of the factories in the United States closed their doors.  The factory was a new experiment in industrialization because prior to factories, people used to do piece work in their own homes, and they get together at some central place and they put the products all together. Some ingenious person came up with the idea and said instead of doing this here, and doing this here, and doing it here, let's do it all under one roof. It was ingenious. It was a simple adjustment, but it was a genius adjustment. So my point is the bull market is permanent. You may lose money short term. The only way you don't get your money back is by leaving the stock market. And the commentary as always is, you got to be out of stock market because the stock market's going down which is a supposition.

And the other thing that investors lose sight of is that the stock market is a leading indicator. Rarely do you have discussions about that. I think what is happening in the economy now is great. The Fed has raised interest rates to not excessive levels but reasonable levels. We are still well under the inflation rate. We are still under historical rates. The economy is slowing. But what is great, because this is the most advertised recession since World War II, maybe in the history of the country: businesses are taking proactive action. They are laying off employees which is not good for the employee, but it's good for the business, it's good for the economy. More than likely, we'll have slow profits growth this year. But when the economy heats up again next year, companies will be in a very good position to post record profits because they pulled in their horns. They’ve increased productivity. They've introduced efficiencies into their business. So in that type of backdrop, in my opinion the stock market can only go one way.

Golden Eagle strongly deviated from the typical aggressive growth fund in the first quarter and the reason is very simple. The stock market went down last year. There is a flip-flop concept in investment performance which most investors are unaware. They understand regression to the mean, but they do not understand that stocks one year and funds one year that are at the top of the performance lists sometimes fall to the bottom next year.  

At the end of last year, the aggressive growth funds were sitting with all these depressed stocks. Golden Eagle is an uncorrelated portfolio, it’s a lot like other aggressive growth fund portfolios but it's different because it does not correlate to the aggressive growth fund group – i.e. those companies snapped back because they were in depressed stocks. At the end of the year, every stock in our portfolio was trading near its all-time high. You have a flip-flop turn in the market. The worst go to the best. We had the best stocks for the year. At year-end they were sold off.

Now, we've gone through this phenomenon. But technology stocks or all stocks with deteriorating earnings fundamentals will not stand the test of time. It does not work that way. In time, the market always resorts back to its classical behavior, recognizing powerful earnings growth. We buy new high stocks that have powerful earnings growth. The good news in what we are doing – our companies are growing a lot faster than corporate profits than the company held in in all other portfolios. I would defy anybody to look at 9,000 funds and look at their respective profits growth and. In looking at the aggressive growth fund universe, of the index companies, the range of latest profit growth is 8% on the low side and 43% on the high side with a median growth rate of 27% which is far lower than Eagle's 95% rate of come close to any portfolio that exhibits 95% profits growth based on the latest quarter growth which will serve itself well in going forward.  

To receive more information, contact us here.

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.

Back >>

Market Defies Gloom & Doom Predictions in Q1 2023

The S&P 500 Index advanced 7.5% while the Nasdaq Composite Index shot up 17.0%.

By
download (PDF)
Back >>