Capital Markets Update Excerpts—March 2024

Transcript:

Paige Tyson:

Hello and welcome to the Fisher Investments’ Market Insights podcast, where we discuss our firm’s latest thinking on global capital markets and current events. I’m Paige Tyson, and I’m a manager in the Research Group here at Fisher Investments. In today’s episode of Market Insights, we’ll round up some of the latest insights from Fisher Investments’ Investment Policy Committee—the primary portfolio decision makers at Fisher Investments. They recently held a special video session for clients, titled the Capital Markets Update video.

In this update, which was recorded on Feb 8th, 2024, the Investment Policy Committee answered some of our clients’ most commonly asked recent questions.

I’ll guide you through some excerpts from that conversation, on topics such as: our outlook for global economic growth, understanding market volatility, what investor sentiment is telling us, and our outlook on inflation and interest rates for 2024.

Before we begin, we ask you to please rate and recommend our podcast wherever you listen. In just a few short minutes, you can help us make this information available to even more people. Thanks for your help!

We have lots of great information to share with you in this episode, so let’s dive in.

Paige Tyson:

One of the first concepts I ever learned when I joined the research group years ago now was you can’t be afraid of all-time highs. Markets aren’t afraid of heights and clients and investors shouldn’t be either. But there are still some things for investors to worry about. Markets are inherently volatile. So Aaron, this next question is for you.

There has been a lot of volatility in the past few years. Two bear markets. But stocks through it all are still up very nicely, which I think can surprise many people. What would you say to relatively new clients who might not be used to the short-term turbulence we’ve seen in markets lately?

Aaron Anderson:

Well, I think you said it very well, Paige. Stocks are inherently volatile, at least in the short term. I think one of the most compelling things about stocks for people with long-term growth goals is, yes, absolutely they can be volatile in the short term. And you're right, we've seen a fair amount of that here recently. But they become much less so over the long term— meaning the farther out you go, the longer your time horizon, the more consistent stock returns become.

It's almost the opposite of what you see in bonds. Bonds tend to be less volatile in the short term. Although you go back to 2022 and there are some exceptions to that. But generally speaking, what a bond does is it provides some lower short- term volatility, which can reduce an overall portfolio's volatility. But they don't give you a lot of growth potential over the long term.

Stocks, in some ways, are the opposite. They are a lot more volatile in the short term, and we’ve seen a fair amount of that volatility recently. But over the long term they become a lot more predictable. No matter when you start, when you start looking at 10 years and 15 years and 20 years, the range of outcomes for stocks narrows quite a bit. So you kind of get to “have your cake and eat it too”, a little bit, and then you get the long-term growth of stocks and you actually get pretty predictable outcomes. But that doesn't mean that they're not unsettling sometimes with that volatility in the short term.

Now, another thing I’ll say is that volatility itself is volatile. Sometimes you go through smooth patches in

the market, sometimes you get more volatile patches. I wouldn’t say what we’ve seen here recently is abnormal at all for the stock market. As we mentioned, stocks are inherently volatile. Yes, we’ve been through a period where we had a mild bear market in 2022. We had a strong rebound from that in 2023. Those tend to be some of the more volatile times in the market. But then you can extend that back to 2020 and we had a lot of volatility, especially earlier in that year. So, there have been some bouts of fairly high volatility here. But it’s nothing to us that looks abnormal relative to what you expect out of stocks. As we said a few times already, volatility is just inherent in what stocks do.

So I wouldn't look back on this recent time and say, "Boy, something's really changed in the market. It's not behaving like it normally does. It's something to be worried about." All the volatility we've seen here recently hasn't been particularly extreme. It's been high but not extreme. But most importantly, it hasn't been abnormal. There's nothing about what we're seeing here recently that says stocks aren't just doing what they ought to be doing—which is a little bit of volatility in the short term, still nice growth in the long term with greater predictability the further you go out.

Paige Tyson:

All right, Mike, we're going to move to you for this one. Despite widespread calls for a recession last year the global economy did grow and now skepticism still remains. Many see a recession could still be ahead. What's our view for global economic growth and corporate earnings this year?

Mike Hanson:

Well, I've given this explanation lots of times now. And I find that the best way to do it is sort of to tell it as a story. But I'll tell you what the punchline is, or the moral of the story. The story is

normalcy. And normalcy that people just have no ability to see because, for the last 3 to 4 years, we've been conditioned to think that we're in abnormal times. People always kind of think that, but that's really been true. So let's just take it from one step to another in very short order. Pre-Covid, growth was moderate throughout the world. It wasn’t anything to get excited about. It was also nothing to sneeze about. The global economy was growing at around a 3% pace. Then, Covid happens. We had a recession globally—but not nearly as deep as people thought by the way. And I want to get back to that, because the resilience of the economy is something that people always underestimate. So we have a recession, but it's about 3%. Not nearly as big as I think it felt. Then you have a reopening, which is in fact bigger than the recession—just shy of 7%.

 So one of the things you see from that is resilience on the way down. And really what was some pent-up activity heading out.

So that gets us into this territory now where we had this huge reopening. People’s expectations did get fairly high. And I do think that’s one of the reasons why we had a bear market. It was a shallow, relatively-short bear market, but it was the comedown from a big reopening. And now here we are. And the interesting thing about it is that if you look at a chart, after the big reopening we go straight back to the trend we had before. We’ve actually had normalcy in a way that almost no one can see. And that’s really the punchline. And that’s really the part that matters the most at this moment. But I want to go back to a couple of concepts.

We said that “anticipation was mitigation”. And when we said to people we didn’t think there would be a recession last year it was because prices are signals. People were alerted to the notion that there was danger and as a result took action. You know, contrary to the way people think, there is no such thing as a fait accompli in the economy. You can react, you can adapt. People did. And as a result, they mitigated the danger.

Well, what’s the redounding feature of that? After taking about a year off from doing a lot of investment, there’s now pent-up activity. In fact, I see a lot of people that are real pent up out there in all ways. CEOs are the same. If you take a year off from doing very much, at some point you got to start opening up the purse strings again and start doing some spending because this is a competitive world. They have shareholders to answer to and they’re going to be looking for ways—once the coast even looks somewhat clear—to start investing again. And that’s exactly what Jeff was alluding to earlier. That we’re looking for where the CEOs see the opportunities. And that’s going to be in the stuff that you can get going pretty quick: ad spending, business travel, IT spending in general, which actually there needs to be a lot more of it yet. People have even put that off a bit. Those are the types of opportunities we're looking for. And so the sum of it all is that you should expect a world of more normalcy than most people can perceive. We don't expect that necessarily the economy just to accelerate ever, ever higher. What we expect within that, though, is to see some real pockets of pent-up strength.

Aaron Anderson:

I'll add one of the effects of that is it just creates more opportunities in different areas. If you just think about that backdrop, we talked a little bit about the “Magnificent Seven” before—and maybe just say generally big, kind of growth- oriented companies—you could argue that they're very well suited for that environment. It's a good economy. It's not a booming economy. From here, interest rates probably look fairly benign. We've seen some nice improvement in inflation rates. If you think about that as a backdrop for 2024, well that usually means big, high-quality companies that can grow relatively quickly get bid up in that type of an environment. Because when you're not getting a lot of juice out of the economy itself—it's a fine economy but as I said not booming—that's a pretty good backdrop for companies that can grow above and beyond just what the economy is doing.

But I think, as Mike alluded to, there's still a lot of upside surprise in the economy here. Not only are expectations still low. Yes, recession worries aren't as intense as they had been back in 2022 but they're still there. And so just the fact that the economy keeps humming along I think is a nice upside surprise for many. And with a little extra boost, maybe from increased business spending and so forth, as companies go on the offensive, I think that leaves some room in the portfolio for what you might think of as more cyclical categories. The types of companies in Industrials, Materials and resources that are tied into a stronger than expected economy. And so whereas over the last few years there's been big spreads between how growth stocks are doing and how value stocks are doing and so forth. This is a year where I think there might be room for both.

Paige Tyson:

I think that's especially true, when you think about what powers the economy. The economic engine tends to be things like lending. And there's been some fears with lending lately with rising interest rates. But you know, my team does research tracking things like SLOOS, senior loan officer surveys, that show that, you know, both bankers and the supply side are being more optimistic about giving out loans. We see demand for loans just fine, not just in the US but in the EU as well. And so it really does set up that positive economic backdrop for cyclical stocks to potentially, like you said, not have such a disconnect between what growth is doing and maybe what value is doing.

Mike Hanson:

I’m so glad you brought that up because loan activity never cratered. It just normalized. And now it’s showing signs of even re-accelerating a bit. That’s all with the narrative.

Paige Tyson:

And you did mention sentiment Aaron. So Bill, let's talk about that a little bit more. Thinking of investor sentiment, you know, is it still as sour as it was a year ago as the new bull market was beginning? What investor fears today are warranted and which ones aren't?

Bill Glaser:

Well, I think sentiment certainly improved, right? I mean, coming off a year where global stocks are up 20-plus percent, it's not as pessimistic as it once was. But it's also not as euphoric as it could possibly be. So from a sentiment perspective, we're probably bouncing around between skepticism and optimism—without getting into too cute of precision there between those. But as I think about potential risks moving forward, I think a real risk—not one that's prevalent here and now—but could be on the horizon is when you get to that state of euphoria, right? Because when you get to that state of euphoria, people will find all sorts of reasons to discount it, to discredit it, and really to project their optimism far, far, far out into the future. And I think that's the point in time where we've got to have our antennas up and be cognizant of that. But we're not there yet, and even being in a state of euphoria, that could persist for some time.

But I bring this up because in the past, we've drawn many parallels to the markets of the mid-to-late 1960s. And if you think about the bear market of 1966 having very similar parallels to the bear market of 1922, there's economic parallels, sentiment parallels, political parallels. That was a recession-less bear market. '22 was a recession-less bear market. You didn't have major capitulation back then, you didn't really have major capitulation in '22. And I bring this up because as you fast forward into '67 and '68, that wasn't a real long bull market in terms of duration. And I think we need to be mindful of that. Could this be a long bull market? Absolutely. And we'll take it each year at a time. But we need to be cognizant of the possibility of us reaching that euphoric level of sentiment when everybody else is discrediting it. And to me, I think that's one of the bigger risks that's on the horizon.

But as you think about all these other things, fears that investors have that you read about or hear about in the media. It could be China, it could be interest rates, it could be US debt. I mean, you name it. Those are all the fears that—if you think what really creates a bear market, it's a big surprise, it's got magnitude. And a lot of those fears, you know, really lack that surprise factor.

Jeff Silk:

I want to add on to what Bill was saying. And we’ve shown our clients this for over 20 years now. And that’s the analysis that we do by collecting professional market forecasts for the stock market for the year. And then we put together a sentiment bell curve. To me, the amazing thing about this year’s sentiment bell curve is the median is something like 2%, meaning market forecasters, whether it’s forecasters for banks or big brokerage firms or whatever, they’re not really expecting a very good year in the stock market. And you don’t have a lot of people that are expecting a huge year, and you don’t have a lot of people that are expecting a terrible year. The point is, is that the bell curve is pretty much in, I would say a “much-below-the-average-market-return phenomenon.” And so it wouldn’t surprise us if it surprised a lot of the forecasters that the market was much stronger than they expected.

Ken Fisher:

So let me just take a second on that. In the 90s, we started creating these bell curves. And the concept behind them was that professional forecasters as a group are wronger, stronger, and longer than other investors. That they, with great access to information, reflect exactly that which is already pre-priced. That which the

stock market does for a living, which is pricing all widely known information. Therefore, their consensus is always wrong. We've documented that over a really long time period. That doesn't tell you what will happen. It tells you what won't happen. And so this won't be a year that's somewhere around 2%. Could it be much worse? Yes. Could it be much better? Yes. But that only gives you one glimpse into sentiment.

Sentiment overall is many-faceted, and some of them are hard to get a handle on, as Bill kind of pointed out. Parsing the John Templeton phraseology of “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria,” figuring out exactly where you are in that Templeton framework is not precise at all. But there are some things that are fairly easy to see. Or, as Yogi Berra said, “Sometimes you can see a lot just by looking.” And the fact of the matter is, if you take a period like just this last month, or so, as you see GDP-type and economic-type reports come in that also previously had a wide variety of forecasters and measurable consensus forecasts about those economic phenomena, and you see the economic phenomena coming in nicely better than the forecast, that tells you we’re too pessimistic. It tells you we’re too skeptical. It tells you sentiment’s not high. It’s not down in the dumps. When you take a period like they expect positive GDP, but not nearly as positive as it comes out, that tells you they’re too negative.

That tells you they’re not really optimistic and they’re not really euphoric. They’re that thing Bill was talking about— straddling someplace between the high end of not-too-much skepticism and the low end of not-too-much optimism.

Aaron Anderson:

And I would say, you know, qualitatively one of the features I think that tells you you're not too far up that sentiment curve is what Ken's always called all the “yeah, buts” in the market these days. I mean, for every positive feature you see out there, there’s a “yeah, but" why people disbelieve it. We talked about the “Magnificent Seven”. It's yeah, 2023 was a good year for the market. "Yeah but," it was only the “Magnificent Seven” driving things. Not true, but that's the

perception. The economy is doing well. But, you know, monetary policy has these long and variable lags and eventually that's going to shove you into recession. Jerome Powell didn't turn into Paul Volcker, but still they're not willing to cut interest rates very aggressively—which, one of the bigger misperceptions economically, is that we need some type of rate cuts for the economy to do well or the markets to do well and so forth. And so I think there are lots of ways to measure where you are on that curve. As Bill mentioned, it really doesn't matter. It's the extremes that matter most. Are you in pessimism? You can look back in 2022 and say there was some pretty extreme pessimism out there. Are we in extreme optimism? Absolutely not. Or euphoria? We don't think we're anywhere close to there. Where you are in between doesn't really matter that much, but I think one of many signs that you're not at that upward end of the Templeton curve is just the fact that everybody tends to disbelieve these positive features today, which probably tells you is, exactly as you mentioned, that there's still a lot of upside surprise potential out there.

Ken Fisher:

So Aaron correctly says—one of the many things that he said correctly—is you need rate cuts. Now, I just want you to think about 2023 documented perfectly that you don't need rate cuts. 2022 actually documented that you don't need rate cuts because depending on where you are in the world, the market started bottoming in June of '22. And by the time you got to October of 2022, the world market had bottomed completely. And we kept having rate rises that whole time. And in 2023, we didn't get rate cuts and the market's going up. You don't need rate cuts. The back half of 2022 and 2023 showed that.

But there's a bigger lesson from that, going back to the point of markets pricing all widely known information. As soon as you can get a very wide view that you can read in every darn place in the world, in the podunk times, that you got to have rate cuts. You know that's priced already. You follow that? It's so simple. People have a hard time with it. People have a hard time getting that whatever your friends at the cocktail party are talking about might be right, might be wrong, but it won't impact stocks.

Paige Tyson:

Yeah, and going back to this question about risk, I tell clients all the time, risks are riskier if no one is talking about them. If everyone's talking about them, if everyone's saying, "Oh, this is going to happen," and then that actually happens— there's no surprise power there. It's already priced in like you said. It's good to keep in mind.

Let's keep on the topic of of rates and inflation. Jeff, this question's for you.[42:35] We said inflation would fall quickly last year and it did. Given that, do we see inflation reigniting as some fear? What are your expectations for monetary policy, the Fed and global central banks, and how do you see that impacting stocks, if at all?

Jeff Silk:

So we would not expect an acceleration in inflation rates. If anything, we would expect them to stabilize or even come down. Let me explain an interesting economic phenomenon that I don’t think a lot of people are talking about. And that is right now you’ve got the money supply barely growing at all, but you’ve got the economy growing. Or another way of putting it—you’ve got the money supply growing at a much slower pace than the economy. That is such an important force that keeps inflation low and possibly even lower. And the other side of the coin is this could be a world where the economy grows nicely, inflation stays the same—if not falls—and that would surprise a lot of people. Because right now people think if the economy is going to be strong that has to mean that inflation is going up and that is definitely not the case. So I think that’s an important feature that I don’t think a lot of people are thinking about it.

In terms of interest rates and monetary policy. First, let me say this about interest rates. And this is a little bit of a pile on to what Ken was saying. We've talked to our clients about this for a long time. And that is that don't be focused on interest rates and the impact on the stock market, because what Ken said is last year rates went up, rates came down a little bit. Stocks did great. But we have too much of a tendency to want to think, “Oh, that what the Fed does is really going to influence what stocks do." And that's not the case.

So with all that being said, I think it's also important to talk about the difference between short rates and long rates. The Federal Reserve and central banks, they control what's going on with short rates, which are things like three- month rates. Whereas it's the market that controls what goes on with long-term rates, like the ten-year rate. And what the market is looking at are things like inflation expectations. What is the supply and demand out there of Treasurys? How is the economy doing? What's going on with inflation? And what the market's telling you right now, when you look at inflation expectations, is the market doesn't think there's going to be a material pickup in inflation anyhow. So in summary, I think it's important to say that we wouldn't expect a pickup in inflation. We would expect just because the economy is doing strong, does not mean inflations are going up. And to answer your question about interest rates, we wouldn't expect a huge move in interest rates this year. But what does that mean for stocks? All of that is a positive outcome for the stock market.

Mike Hanson:

We’ve been talking a lot about rates and their effect or non-effect on the economy. One thing I like to say to clients a lot, because our clients tend to have a little bit of experience, is I say, what was your first mortgage rate that you had when you first became a homeowner? Was it 5% or 6% or 7% like it is today? Actually, no. Many of our clients had their first mortgage be 8%, 10%, 12%, 15-plus percent because that was a time of high inflation. Truly high inflation, persistent at a time when they were first becoming homeowners. And yet they still exist, and they're here as clients. They somehow made it through. And that's so reminiscent of things. We've had this sort of theme of adaptation and anticipation as mitigation. It's the same thing there. And then it follows through in interesting ways.

So people worry about interest rates. Well, the first thing to think about when it comes to housing is you actually have to scale it for the economy. The average American’s mortgage is actually 3.8% on a mortgage. So what really affects things is the new home sales. And you might say, “Wow, these high interest rates are definitely hurting the economy because new home sales are down.” And in fact, that’s true. It is a place where interest rates affected things. Home prices—new home prices—are down 18% from their highs tied to the higher interest rates. Less sales. Right? That’s significant. In fact, that’s a bigger decline than what we saw in 2008 and 2009. And yet GDP not only grew, it accelerated in the last two quarters. Why? Because these things don’t have the effect on the overall economy, and by extension then the stock market, that many people think. In fact, housing, something very affected by interest rates, did not stop the economy from growing and moving forward. And that’s just another way to contextualize all this. Interest rates are just one mechanism of a very large system.

Ken Fisher:

This is a minor point that people have a hard time putting into perspective, the same way that they have a hard time getting that the average effective home mortgage rate in America is 3.8% right now. That the fact that new mortgages are almost twice that, doesn't necessarily bite the economy. Housing starts are down. Absolutely. But going back to Michael's earlier point about relative normalcy, housing starts have always been volatile and the current level of housing starts is pretty much average for the last 40 years. It's a pretty normal period. It's just down from what was a higher period earlier.

Paige Tyson:

Okay, Mike, this question is for you. We regularly heard concerns from clients this year and last year about the impact of new and emerging technologies like artificial intelligence, cryptocurrency and central bank digital currencies. What are your thoughts on these and how do they fundamentally shift how we think about investing, if at all?

Mike Hanson:

Barely at all. And, you know, I always get this asked this question because I love thinking about this stuff. And I do a ton of talking on that, but we don't need to do a ton of talking because the answer is that it won't change capital markets in the short term very much at all. I invite people to think of the irony of the question because it's become perennial. We've been asked this forever. What are new technologies going to do to the capital markets? And people not recognizing that that question being asked forever is the answer in itself.

Technology loves to find some of its first uses in capital markets, whether you go back to ticker tape, uses of computers— all those sorts of things—because there's money to be made. And where capital markets are, technology tends to flow.

That's always been true, always will. In fact, we should invite that.

So instead of doing all that and talking about, you know, all these types of things, I would just ask clients to think of it this way. If you see a new technology that you somehow believe is going to be pernicious or could change things

structurally, then you need to ask yourself, "Is it in a stage where truly, commercially or in a broad sense it can be adopted and used in a wide way?" Because one of the interesting things that's a little bit of a breaker to technology, just moving as quickly as it does, is that when it gets into the wider economy or the world itself, it has to be applicable. You have to have the setup for it to happen. You know, it takes decades for the internet to be set up and become dominant as a force for capital markets, for example. These things don’t happen overnight.

So if you take something like AI, or I’m going to take crypto in particular, the setup just isn’t there for it. And so you can see it. Some of it will seep its way into some of economic life, but not as much as you think. Why? Because crypto, which the blockchain technology behind it I believe is a really interesting and in some ways great idea, just can’t be widely used today. There’s not nearly enough energy out there. We would need nuclear energy across the world being utilized in a big way in order to have the real energy necessary to run a blockchain for the entire world. Let’s just put that out there.

The second thing Is, there's not nearly enough computing power. I would go so far as to say, and this is a little bit speculative, that we may need to get into something like the age of quantum computing—that type of a leap—before you can actually run these technologies in such a broad way that they can just be done instantly, pervasively, the ways that we can think of all these things. And so, just ask yourself those questions. And a lot of this stuff goes right back into the background.

On the question of digital currencies is a little different, because some governments are talking about utilizing these and it does have people, you know, somewhat concerned. And digital currencies are just going to be a tremendous double- edged sword for society. Because on the one hand, they will bring greater efficiency, greater transaction fidelity and all the rest of that…speed. On the other hand, there's going to be a decrease in privacy, period. Because one of the reasons governments want to do it, of course, is they cite things like collecting taxes, being able to track transactions for what they view as crime and so forth. Well, that's going to lead to a decrease in privacy. Countries like China already do it.

And sure enough, they do. It contributes to things like social credit scores and what have you. Places like the United States have talked about it, but talk is cheap. What the Fed is doing is just some testing and they're writing some papers in their various branches, but they are a very, very long way from adopting anything like that. If and when the time comes—I still think it's many years away, perhaps even more than a decade—we'll be looking at it closely and how it does affect how banks do transactions and all the rest. But for now, it's just not something for investors to worry about.

Paige Tyson:

That’s it for this episode of Market Insights, featuring members of Fisher Investments’ Investment Policy Committee.

If you want to learn more about the topics we discussed, you can visit the episode page on our website—fisherinvestments.com. You’ll find a link in the show description.

While you’re there, check out the MarketMinder section of our website—where you’ll find all of Fisher Investments’ latest capital markets insights. It’s a great place to check in regularly for our most recent thoughts on the markets and current events.

You can also subscribe to our MarketMinder digest, which is a weekly newsletter delivering those insights directly to your inbox.

And if you have questions about investing or capital markets that we can cover in a future episode of Market Insights, email us at marketinsights@fi.com and we’ll do our best to answer them in a future episode.

Until then, I’m Paige Tyson. Thank you for listening.

Disclosures:

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated herein. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.