Gus Scacco, chief executive officer and chief investment officer of Hudson Valley Investment Advisors, spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): You’re a believer that earnings are going to continue to be strong going into 2025 and beyond. What makes you think that?
GUS SCACCO (GS): A couple of things. We’ve had a rotating recession, so each industry segment has basically gone through and cleansed themselves. What do I mean by that? We had a tremendous amount of hiring in tech, as one example, because they were building, not for today, but they were building for the next two to three years that stopped last year and there were actually a lot of layoffs. So they’ve improved their margins, they’ve right-sized themselves. And this has happened not just there, it’s happened through retail, it’s happened through the industrial sector. It’s actually happening right now in trucking. So as those get cleared out, companies are actually more resilient and they’re able to take on and show higher leverage. So the next push through, in terms of an improvement in their economic well being, will show higher margins and improvement. Right now we’re at about 11.7 margins right now. If we go through a recession, we usually get to 6 to 8%. I don’t think we’ll get back there. It’s just we’re more resilient and we actually are more efficient in the use of capital.
AM: Yeah, interesting. You mentioned that it is a ‘rotating recession’. I never heard of that before.
GS: Yes, it’s happened through different industry groups and one of the things that we’re really strong on is that we don’t think we’re going into recession. And the reason is, when you have a recession, there’s usually overages, too much inventory that usually has to get cleaned up and it takes time. There really isn’t a lot of inventory. If anything, companies have been working off a lot of inventory levels and we start to see the beginnings of an improvement for the industrial space and other areas in terms of growth, in terms of order levels.
AM: Another driver of the market is interest rates. Do you think the Fed’s gonna cut the summer? They’re gonna wait until after the election?
GS: We think that as they get closer to the election, maybe just before it, they might cut, but we don’t think they’ll do it in the next couple of months. And the reason for that is they are partisan, but they’re not political. They don’t want to be in the middle of an election. If they end up waiting to July, you end up being right in the middle between the Democratic and Republican conventions and they will be in the center of all of this by the news media. So I believe they’re gonna hold off right now. If you’re looking at inflation levels, they’ve been bumping, they’ve been heading lower, but they’ve been bumping along and it’s not mechanical, it just doesn’t happen that one or two data points give you solace that things are moving in a certain direction, takes time and we believe that we’re going in the right direction for lower and it should allow the Fed to have a little bit more leeway. But we’re looking at calendar years here. It’s eventually going to be seeing rates come down by how much, maybe one or two or even three rate cuts. But that probably is something that we’re looking at over six to 12 months. Not something that we can categorize by December 31st.
AM Do you think that these potential cuts are already baked into the stock market pricing or is there gonna be a strong reaction when they do it?
GS: If you look at the Fed fund’s futures, they’re baking in one and a half to two cuts right now. And I think there would be a positive reaction ‘cause it’s giving you direction. Let’s face it. If you’re a financial institution, you’re able to offer rates that are lower. It frees up more capital and it makes, we’ll call it, if there’s potential for bad debt, it’s because of maybe higher interest rates. So that actually will relieve some pressure there. So I think the markets would react favorably.
AM: And for the retail investors out there, how should they prepare for that?
GS: Right now, if you’re somebody that’s invested in bonds, you’re probably going to be barbelled so that you can have the higher rates right now on the short end. And as those mature, you can put ‘em in higher rated paper that’s longer and dated and that will actually lock you in over a longer period of time so you’re not taking reinvestment risk.
AM: Aright, thanks a lot, Gus.
GS: Thank you.
