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'Markets are just catching their breath': Strategist

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Katam Hill Founder & CIO Adam Gold joins the Yahoo Finance Live panel to talk the latest market action as the Dow struggles to find its post-Labor Day direction.

Video Transcript

- We're going to continue the conversation on the markets for that. We want to bring in Adam Gold. He's Katam Hill founder and the Chief Investment Officer. Adam, when you take a look at the market's recent action we had the Dow off just around 100 points if it closes lower today, the fourth day in a row that we've seen declines for the Dow. From your perspective, what's weighing on investor sentiment over the last several days?

ADAM GOLD: I think it's just markets catching their breath, and we've had a terrific year. Earnings in the second quarter were phenomenal, one of the largest beats relative to expectations in years. And we have very low interest rates. So that's something we'll talk about in a bit. But, this is all very stimulative conditions for companies, for consumers, for businesses. And so I think the markets are just taking their breath here, up almost 20% year to date.

- Adam, the emphasis that we put on the correlation between the 10 year, for instance, the yield on the 10 year and then the action we see in equities, are we in a new kind of-- and I hate the expression, but a new kind of paradigm where we should as investors stop using the old correlations and look at everything basically just from fundamentals? Have we overblown this discussion of taper and its impact on equities?

ADAM GOLD: Well, it's important. I mean, historically, right? When rates were much higher, fixed income was a great alternative to riskier asset classes like equities. When you have rates where they are today as well as inflation that's running at 5%, we think about, well, what's the alternative to the fixed income being below inflation? Means you need to be investing into equities and to riskier assets.

So looking forward until fixed income can offer you higher returns than inflation, which we're not even close to that level today, then I think the fear and concerns over tapering and higher rates are a bit-- you're not overblown because they're very important given asset allocators will eventually think that perhaps if inflation gets lower and rates get higher, that there's a better alternative. We just focus on equities. And so we're quite biased in our view, but we believe equities are the only game in town. We've thought that for a very long time. And we still think that's going to be the case even after tapering and even after rates start to move higher.

- So Adam, if equities are the only game in town, I guess, what exactly are you favoring? What are you buying? Where are you seeing opportunity then over the next couple of months?

ADAM GOLD: Well, we're very long-term investors. So I know you-- we talked about where do we see the markets going on a daily, weekly, even quarterly basis. We don't think that's something that we spend a lot of time thinking about. Obviously, it's important to have a frame of reference and understand where markets are.

But, we're fundamental investors. So we think technology is the greatest time to be involved when there's massive innovation, when there's exciting product cycles. And so we have very strict criteria what we invest in. We think about founder-led businesses with massive global markets that are profitable, that have innovation, that can vertically integrate, that have developers that work on their platforms making their products better. So we think about the universe.

And reality is there are very few companies that you want to own. And like any given year, about a quarter of the market-- looking at the S&P, a quarter of the stocks within it will decline. This over the last 10 years. And of that, 50% that are positive, half will underperform the benchmark. So only one-third of companies actually ever do better than a benchmark in a given year. So we just try to take that creme de la creme of the top, and really realize and think that's where, you know, the best compounding can be for the next 10 years.

- Adam, did you just make a case for passive investing or index fund investing, I mean, with the data you just shared with us?

ADAM GOLD: No, quite the opposite. I mean, I think being in equities, I think I make the case, right? Equities have returned 11% the last 10 years. And overall, when GDP expands, another statistic, 91 years of history went back and looked at it-- 85% of the time when GDP was positive for the year, which was about 2, 3 quarters of the time, 85% of the time, the S&P was up in the year where GDP expand. And when GDP declined, 2/3 of the time, the market fell.

So economic activity, which is job growth, production expansion, these are drivers of stocks in the long term, not necessarily on any given week, or month, or quarter. But if you have a year where GDP is expanding, 85% of the time, the market's going to have your back. So we're very positive on equities. We're particularly positive, you know, we only invest really in amazing technology companies on a global basis. We still think that that's the place to be, and we just try to focus on those, you know, very tight criteria with founder-led businesses that are profitable today not in 10 years in the future.

- All right. Adam Gold, Katam Hill founder and Chief Investment Officer. Thanks so much for joining us.