Ken Fisher Answers Questions on Biotech, Energy and the Fed June 2023

Transcript

Naj Srinivas

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 Naj Srinivas, senior vice president of corporate communications here at the firm. Today, we’ll hear from founder, Executive Chairman and Co-Chief Investment Officer of Fisher Investments, Ken Fisher.

In this episode of Market Insights, Ken answers some common listener questions to help them better understand the world of finance and investing. 

Before we dive in, I'd like to ask you to rate and recommend our podcast wherever you listen to it. In just a few minutes, you can help make this valuable information available to even more people.

Thanks so much for your help, in advance.

With that, let's dig with this month’s Ken Fisher mailbag.

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Ken Fisher

Every month I respond to a few what I call mailbag questions that come in from clients or video viewers. And so I've got a few here for you.

I don't give long answers to these.

One question is do biotech stocks do well in a recession? Well, let me put that in perspective. Biotech is a very specialized area. Most of the companies are small. Most of them are not particularly profitable. They typically are thought of as small cap growth stocks, although some of them aren't quite so small.

In that, what can I say about what happens actually in a recession? You're going to hate the answer to this. In a recession, stocks pretty much go through the roof. It's before the recession that stocks have most of their decline, and biotech stocks have most of the decline. The real question is do biotech stocks do particularly better than others as you get that bounce during a recession? In the market. That's the beginning of the next bull market. And the answer is not particularly. They tend to be volatile, but they tend not to be the stuff that bounces the most early. Why? Let me take you to a tangent on this. The fact is the things that tend to bounce the most early in bull markets categorically are the categories that got crunched the most in the bear market that precedes. Not every single stock, of course, but the categories, the stocks in this category get crunched the most. That category tends to bounce the most. And biotech, for the most part, does not tend to get crunched the most. It's less what you could view as economically sensitive than a lot of other parts of the economy are. And usually it's the parts that are the most economically sensitive that get crunched most. What you want to do when you look at a recession is, remember, once you're actually in a recession, stocks go up because they're looking at the future. They're not looking at the present and they're not looking at the past. And then you say to yourself, what is it that got crunched the most in the bear market by categories, not every single stock, but by categories. And you want to look at those categories where the things will bounce the most.

Uh, that. Leads me to the next one because it just flies perfectly into the next one, which is, gee, just lately, energy stocks have been lagging. Does that mean it's a good time to buy?

Oh, let me repeat what I just said a moment ago. The categories that fall the most in a bear market tend to bounce the most. The reciprocal of that is the categories that fall the least in a bear market or don't go down in a bear market tend to go up the least in the next bull market, early. Simple logic, consistent logic you follow that.  

Energy did great in 2022 up through and until we hit the bottom of the market. In depending on how you measure it, the end of September, middle of October. The fact is, since then, they've been lagging. Why? Well, remember when, for example, the Ukraine war started. We're already seeing accelerating inflation. Ukraine war creates a lot of disruption, put a lot of sanctions on Russia. Russia's main export is energy. General presumption at the time is going to be energy shortage. Oil bumps up to 130. A lot of people are forecasting $200 oil. Fact is, that lasted no time at all. And then oil imploded back down 40%.

Energy stocks are more price sensitive than they are volume sensitive. And last year. Volume actually went up pretty much everywhere, including Russia. Russia produce more oil last year than ever. Why? Pretty much because it had to. And it sold it off just to different countries than it had been selling to previously. Previously, what was being sold mostly to Europe and the West went off into China and India and then resold off otherwise.

The point being energy did great in the downturn, actually rose. So it's lagging now. It will continue to lag because production in energy remains strong. And, you know, people say and there's some truth to this. And also at the same time that the announcement of the OPEC plus countries that they're going to cut to keep price up, that should make energy oil higher, help energy stocks. Fair enough presumption.

The fact of the matter is that literally from two days after that oil is down and oil did bounce with that. And then two days after that, oil is down. And with that, we continue to have a world where the largest producer in the world of oil is the United States, and we keep producing oil and we keep finding better ways to do it. The world overall is producing energy. The Russians keep pumping out energy like crazy and all of that as we keep doing more. And having completed the process of sidestepping all of the dislocations that occurred with last year puts pressure on the price, keeps energy stocks from doing great. Thank you for the question.

We're going to go three in a row here. What do you think about value dividend investing? I think sometimes it's good, sometimes it's not so good. When is it good value does well in the reverse time periods of when growth stocks do well. Last year, as you recall, in 2022, growth stocks both tech and luxury consumer discretionary stocks got hurt.

This year, they bounced. Down badly this year. They're bouncing up better. Better because, as I said before, categories that fall the most in a bear market tend to bounce the most early in a new bull market. Leading stock market in the world this year is a France.

Why is France hitting all-time highs, the leading stock market in the world? Because it is the epicenter of high-end growth consumer discretionaries led by LVMH. The fact being that when we think about value, it didn't fall that much last year. Therefore, now it's not going up the way you would early in a bull market.

Same point, three, three questions in a row.

Oh, we get one that's not the same thing. Ah, but it's the same thing I've been talking about for decades and decades. You, Ken, are critical often of the Fed and central bankers. Yep.

In your view, what do they get wrong and what do they get right, if anything? Was there a time you thought central bankers were doing a good job?

So let's just parse out what central banking is a little bit. Most people put most of their focus when they think about central banks into part of central banking, which is monetary policy. What do they do to interest rates? What do they do to the quantity of money? All of that. In the last, you know, the last year and a half, there's been an inordinate concern about Fed in America, but also major central banks overseas raising short-term interest rates. You know that, that monetary policy part.

The other part that they engage in is regulatory [oversight] of banks. In America and other central banks overseas. People don't want to believe this, but for the most and they particularly don't want to believe this because of the things that happened with Silicon Valley Bank Signature bank and the concerns that that spun into almost going viral, if you will, into fears of major systemic banking crisis. First I'm on a tangent and say there was no major systemic banking crisis. Those two banks. Got in trouble. We got 4,200 banks in America. More banks outside of America. You got 4200. Anything. Some of them are going to be doing better than others and some are going to get into trouble somehow. That's been going on forever. Pops out in little periods. If you actually look at emergency borrowing from the different 12 Federal Reserve regions. The only ones that had a spike in emergency borrowing were the San Francisco one, where Silicon Valley Bank was, and the New York one where Signature Bank was the others not. We didn't have a systemic problem. People have a hard time getting that.

My point being, there was a presumption with all of that that the Fed does a lousy job regulating banks. They're not perfect, but they actually do pretty good job regulating banks. They've got 4,200 of them and we don't have a lot of banking problems. Traditionally. We have a little few that pop up here and there. Once you take 4,200, anything, you're going to have some problems with them. It's just the way life is.  

Monetary policy, they're not so good at monetary policy. They're not so good at because they keep coming back to this point of forecasting and they're not very good at it. Let me help you see that in our US Central bank, the Fed. But this is also true for foreign central banks like the Euro Bank, the Bank of Japan, Bank of England. But think of the United States, the head of the Fed, currently Jerome Powell. We have a long history of him going back. They're easy to look up. They come from varied backgrounds, mostly academic. Not fully so, but mostly. Sometimes business.

None of them, after they were head of the Fed, went on to have a great history in forecasting anything. I just want you to think about that. Not a one. If these are people that aren't very good at forecasting anything, why would you expect them to be? I go back to my point that you can just over and over see them saying. This is what we're going to do. And then shortly thereafter, finding that they flip flopped on it. The point that I make about 2022 most commonly is Jerome Powell said on May 4th of 2022, we are not even considering—I'm quoting almost verbatim. Let me see if I can quote it verbatim—the committee, the Open Market Committee is not even considering 75 basis point interest rate hikes in the federal funds. Instead, what did they do the next month, June 75th, basis points. The next month, July, another 75 basis points. Maybe they took a vacation in August. I don't know. They skipped it in September. Did 75 basis points. They skipped October again. In November, [they] did 75 basis points. The month before they did the first 75 basis points, they were not even considering 75 basis points. You follow my point. The fact is. Forecasting isn't easy to begin with, particularly thinking about what it is. That's all the stuff they have to do with the double mandate of trying to minimize inflation while keeping supposed unemployment low. That's a tough thing to do.

They—a whole bunch of people led by a leader—they're just not very good at it. They never really have been very good at it. William Chesney Martin is the longest running head of the Fed from the 1950s until 1968, said when you become head of the Fed, you take a little pill and it makes you forget everything you ever knew. And it lasts just as long as you're head of the Fed. The next head of the Fed, Arthur Burns, was the best trained up to that point in time person ever to be head of the Fed. Legendary guy before he became head of the Fed was a near endless mistakes. After he was head of the Fed for eight years.

He was asked, Why did you make all these mistakes doing things you said you'd never do? He said, It's because I took Martin's pill. The fact is, they all take Martin's pill.

Forecasting isn't easy. They're particularly not good at it. Not a one of them's ever then gone on to have a great history of forecasting after that. That's the part that I can never become comfortable with about them. The regulatory part, they're actually pretty good at it.

Thank you so much for listening to me.

TRANSITION MUSIC

Naj Srinivas

That was Ken Fisher answering listener questions as part of his monthly mailbag. Thanks to Ken for sharing his insights with us.

If you want to learn more about the topics discussed today, you can visit the episode page on our website, Fisher Investments.com. You'll find a link to that in the show description. While you’re on our website, you can also subscribe to our weekly digest, which rounds up our latest commentary and delivers it right to your inbox every week. And if you have questions about investing or capital markets that we can cover in a future episode of Market Insights, email us at mailto:marketinsights@fi.com.

We'd love to hear from you, and we'll answer as many questions that we receive as we can in a future episode.

Until then, I'm Naj Srinivas. Thanks for tuning in.

Disclosure:

Investing in securities involves the risk of loss. Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher Investments, and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Copyright Fisher Investments, 2023.