Ken Fisher on Market Bubbles, Budget Deficits, US Presidential Cycles and More – October 2025

Transcript:

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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, Executive 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 you better understand the world of finance and investing.

But before we dive in, I'd like to ask you a favor. Recommend our podcast and rate it wherever you listen. 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 in with this month’s Ken Fisher mailbag. Enjoy.

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Ken Fisher

So, every month questions come in to me and I write them on these little cards so, my septuagenarian eyes can actually, see the thing when I'm talking to you. And I read them to you. And I try to tell you briefly what I think, which is nearly impossible for me to do, because I tend to be too wind baggy. But, as it is, what is your view on headline saying stocks are very or too expensive right now? And are we building a bubble?

Now, let me just say this question has got a whole lot of stuff in it. First, headlines tend to reflect in a perverse way, consensus views. So, when headlines tell you that they think stocks are maybe too high, that's expressing fear. You follow that? The fact of the matter when stocks are really too high, you usually don't get headlines saying they are because everybody thinks then stocks are the future and stocks are going to be great. And it's different this time and it's going to be wonderful. It's when you don't see those, that it gets scarier.

Are we building a bubble? Let me just say that before we had 2007, 8, 9, the word bubble didn't come up as much as we've had since 2007, 8, 9. And now people assign all kinds of things to category a bubble. But in finance history, bubbles were something that happened big, broadly, and very very rarely. You didn't get a bubble around every corner. You didn't get a black swan around every corner. Black swans are supposed to happen about once every hundred years. The fact is most bull market peaks in stocks are not bubbles. They're just very conventional. John Templeton famously said, and I’ve quoted many, many times that “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

But euphoria and a bubble are a different thing. Euphoria is when people are looking at forecasting two, three years out into the future and thinking, it's going to be great. And boy oh boy, isn't this wonderful? A bubble is when people think it's different this time and it's really unique, and you can't lose on this one. You just can't lose on this one. And this one, of course, is the stock market. We really don't have any of that. There's abundant worries in the world right now and when you really have a bubble, you don't get a lot of worries.

Now, it is true that the question is framed in terms of headlines. And I told you I couldn't do this briefly. And the reality is that the nature of media in my lifetime has changed. Before about 1980, it was not true that media was always inherently negative. Sometimes it was. Media has become more inherently negative and particularly after the introduction of the internet, as we evolved evermore into the world of if it bleeds, it leads, because that fear that the media can put forward ingenerates a desire for you to focus in on it. Fear catches attention. It’s one of the reasons that people like things like sci-fi horror movies. I don't understand it myself personally, but I know a lot of people do, because we focus in on the fear. It grabs us. But media often portrays fear much more than it did when I was young, and there's some tendency for that. But in a real bubble, fear tends to go away. So that's one down.

Don't budget deficits add to debt? Oh, duh, by definition. I mean a budget deficit is the government spending more money than it's taking in in taxes, which translates immediately into debt. But then the question goes on and says and doesn't continually increasing debt undermine the value of the US dollar and therefore put pressure on the dollar as the global reserve currency and reduce the demand for treasuries?

No, that is all commonly said and fundamentally ignorant. Let’s put it a different way. This is going to be so easy if I frame it this way for you. Let's say government debt increases by 2% a year, and inflation increases by 4% a year. Well, the inflation is making the value of the dollar fall, not the debt, by definition, because that's what inflation does.

But it's making the after inflation accumulated repayment value of the debt. That is the debt after inflation, less by a couple percent a year. So, the statement says doesn't continual increasing debt undermine the value of the US dollar and therefore put pressure on the dollar? The fact of the matter is, no no no no no. What undermines the value of the dollar is when the central banks of the United States in the world increase the quantity of money relative to the increase in the production of goods and services, and has nothing to do with government deficits or debt.

And then finally, there's this whole part about global reserve currency. Now, global reserve currency is really not the important thing that a lot of people think it is. It's not a bad thing. It's marginally good, but it's not that important. Currencies in today's world compete freely in value around the world in a capital market that's trading them all of the darn time and to the extent that the dollar loses its value, which is the way this question framed, relative to other currencies that's priced in all the time. Now, this year, 2025, the dollar is weak. Did you know that this is not the only year in history when the dollar has been weak, and that in other years, at times, the dollar has been strong?

Let me just babble on this one. If you go back out at the time of, let's say, Richard Nixon. Republican presidents’ terms with the singular exception of Ronald Reagan's first term, have always seen the dollar of the value fall.

But this current administration under President Donald J. Trump, is very much in favor of a weak dollar. I think they kind of missed the point. Weak dollar, strong dollar, doesn't really help. And if you go back and you look at the dollar versus pound sterling Britain. Euro which goes back to 1999, not earlier. Yen, Japanese yen, another important currency.

Over those histories, there's this irregular sign wave of the dollar strength and weakness, and they all come back to where they were before, eventually. And the dollar relative to pound sterling, where it was 40 years ago and it is for this currency and that currency. That's not true for some little currencies from smaller countries and what have you. But of the majors, they all sign wave like big, long ripples on a lake. And the fact is, it doesn't having to do with the government spending, the deficit, or the debt. And let me say that differently. Americans have always been debt phobic. Maybe not as much as Germans, but always debt phobic. The fact of the matter is, if the debt in the last couple of years had been huge, then long-term interest rates would have gone through the roof.

If you just look at debt over the last year, it's gone up quite a lot and long-term interest rates have been pretty darn stable. Just want you to think about that. Markets are good at pricing real risks.

Which leads us to the next question. Should investors be worried about rising long bond yields? Is this a bad sign for the global economy? And in fact, long yields are rising around the world. Not everywhere, but they are rising around the world. Rising more in some places than others, of course. Is that inherently bad? Sometimes it's a sign of some problems. Sometimes it's a good thing. Why can it be a sign of problems? And why can it be a sign of good things?

Well, it's inherently what happens, if for any reason, lenders become a lot less willing to make long-term loans. And if lenders become a lot less willing to make long-term loans, that's inherently bad for the economy, because all kinds of parts of our global economy need to be able to borrow money long term. So categorically, global long-term rates rising if it's because lenders are reducing the availability of money is a bad thing. The price itself is not as important as the availability ever in monetary matters. People always focus on the price, and there's a reason to do that. And that's not an illogical thing to focus on. But it's also important to focus on the availability. If we think about that this way, we can think about it another way.

What's important most all the time, and sometimes there is variations why it's not important and I've talked about some of these in past commentary and columns that I've written, but it is the slope of the so-called yield curve, normally short-term interest rates or below long-term interest rates. Although sometimes that's not true. Sometimes short-term interest rates are above long-term interest rates. But banks globally are in the core business of taking in short-term deposits and paying short-term interest rates to get those deposits and using that as the funding base to make long-term loans at these higher rates.

So, the steeper the yield curve is, the more they're prone to lend usually. The less steep it is, the less eager they are to lend because they make less money on the next marginal loan. And when the yield curve inverts, they tend to become very defensive about what they want to lend to or not lend to because they can't really make money on a loan of comparable quality to the funds that they're making short-term borrowing from. So, as long rates have gone up this year around the world, so has lending. The availability of money has increased. When long rates go up and the availability of money increases, it’s not a bad thing at all. And that's something that people don't think about because they only think about the price part. You should always think about the price part and is the availability going up or is the availability going down? If the availability is going up, it's good. If the availability is going down, it's bad. 

Let's see. We got a couple more here. Oh, I seem to have read a few times over many decades that the second year of a new president's four-year term may be the worst in regard to low stock indexes. In addition, I've read that the third and fourth year within the president’s four-year term is the better years for stock market returns. Any statistical truth to these presidential cycle theories?

Yes, that's very true. And I think I'm one of the first people that ever started writing about that stuff. I've been writing about this nearly forever. I mean, like forever, forever. Let me take you through that for a second.

If you look at the first and second years and you just array them by first, second, third and fourth years of president’s terms, going back to 100 years ago, you'll see really quickly that the third year of president’s terms both got the highest average return and the lowest frequency of negative. There hadn’t been a negative third year of a president’s term since 1939, which is only down, something like 9/10th of 1% of the S&P 500, as we're going into World War II and 1939. If you look at the fourth-year presidents’ terms, it’s negative more often than that, but not nearly as negative as the first two years, with each of the first two years, it’s been positive about 60% of history, negative about 40% of history. And it is also true that in some of those periods, first two years of president’s terms, it's seen two years in a row in negatives or two years in a row of positives.

But the most common pattern in first years of president’s terms of the year of positive and a year of negative. That doesn't mean that will happen this year. In 2025, we're having a positive stock market year. The US market tends to correlate positively with the non-US market, and that goes back a long time in history, longer than you think and so the impact of the presidential cycle does impact the global stock market as well. Partly that’s because the US economy is the biggest economy in the world and constitutes 25% of global GDP and the US stock market is the biggest stock market in the world. So, there's a logical flow of funds overlap and all of that.

But the fact of the matter is, if you were just playing historical odds and you never just play historical odds, you never just play historical averages. If you were just to do that, you'd say, well, since the market's up in 2025, first year of president's term, odds increase goes down in 2026, second year of a president's term because most of the first and second years together, if one of them is up, the other one's down, one of them is down, the others up, and there's a few that are both up and both down. To make that decision, about 2026 still requires looking at 2026 singularly.

But yes, in fact the data is overwhelmingly conclusive in that history. You can see that in most of my books. In all of my more recent books there's been some little part about that somewhere. But if you were to go to my Debunkery book or Markets Never Forget book or Only Three Questions book, it's in all of them. And I encourage you to think about that. Let me take you to one more point about this. Midterm elections tend to bring big legislation in America to a halt, for the rest of that president's term. There's basically almost no, not no, but almost no attainment, really, really, really extreme in history to get big legislation through a third or fourth year of a president's term.

Stock market does not like big governmental shifts. It just doesn't. People like you hate losses more than you like gains. The average American hate the loss two and a half times as much as they like a gain. The average German hates a loss six times as much as like a gain. This stuff's been measured pretty precisely by multiple sources in statistically and psychologically significant ways.

The fact is, almost all big legislation takes from somebody to give to somebody else, somehow, someway. There's almost no real free lunches in this. And therefore, when we do a lot of that. What do we do this year? We did the One Big Beautiful Bill. We got some other stuff, too. Might we be doing some big stuff next year?

Yeah, maybe. But once you get to the midterms, it tends overwhelmingly with only a couple exceptions in history, to take some relative power away from the president's party and to give it to the opposition party, which then quagmires future legislation for the back year, the third year and the fourth year. And that shift is what tends to drive the third year to be such a wonderful year in history, which would be 2027, of course.

But what happened to 2026? Let's come back and look at that as we get to the end of December, beginning of January, and we will surely, to see if we think that'll be another positive year or if it'll be a negative year.

Why do you think stock markets in Japan and Taiwan are hitting record highs? Well, let me go to several reasons for this. One, they haven't for quite a while. Two, as the US tech firms have had a little bit of sideways stagger in this year. Taiwan, which includes Taiwan Semiconductor as its biggest stock in particular, has had a tremendous run because the world needs semiconductors for all things that relate to cloud computing and artificial intelligence. So, if you look at the world of tech, there's Nvidia that's going to design chips, and then the actual manufacturer of chips in a dominant sense around the world is Taiwan Semiconductor.

The Japanese market is a little bit different. It's got some of the same benefits, but Japan is much more of a value stock-oriented world, in the year where value stocks have done well. Bank sensitive country, in a year where bank stocks have done well. And consistent with some of the comments that I made earlier, the yield curve has improved more over the last 12 months in most of the countries of the world than it has in America, and that's true in Japan. That's true in Taiwan. This has contributed to increased lending in both those countries compared to the lending that was going on before and as I said in prior comment, the availability of money is always more important to a country than the price itself of the money. And as money has become more available in both those countries, the economies have done better, and the stock markets are priced out.

So those are the questions for this month. If you have more questions, send them in for next month. I'll try to answer the ones that I can, if you want to ask questions about why I'm so funny looking, I don't really got a good answer for that, probably going to have to blame part of it on my parents but thank you for listening to me. I hope you found this useful, enjoyable, and I look forward to be able to help you with this again next month. Take care. Have a great month ahead!

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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 of 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 marketinsights@fi.com.

We'd love to hear from you, and we'll answer as many questions 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.