Bear Market Causes and Risks We’re Watching

Transcript

Aaron Anderson:

Well, first off, I'm going to put this in a very simple format that our founder, Ken Fisher, developed a number of years ago. He said that bull markets end in one of two ways. It's either the wall or the wallop. What we mean by "the wall" is the wall of worry. There's this old investing adage that bull markets climb a wall of worry, meaning there are always things the market is worried about. But investors overcome those fears, and the bull market continues. When we say the wall can be a risk for the market, we mean getting to the end of that wall of worry. Essentially, it's a statement about investor sentiment. When investor sentiment gets to be so positive and nobody is seeing any risk to the market anymore, well, that tells you that sentiment is pretty high, probably even euphoric. That's a very treacherous period for the market because what ultimately drives stock performance is how reality plays out relative to expectations. When expectations are just so high that investors don't think anything can go wrong. Well, that really sets them up for disappointment. And so, looking for some type of euphoric sentiment is one of the things we pay a lot of attention to when we're forecasting what the market will do, and as we start to think about the potential for a bear market. And I'm happy to say we're really not seeing that today. Yes, there are some signs that investors are optimistic, but no signs that there's really broad-based euphoria. You can see pockets of real optimism. Maybe it's related to artificial intelligence or some other smaller themes, but across the entire equity space, we're not seeing that type of euphoric investor behavior. And so, I think we're not quite to the end of that wall yet; there's still lots of room for investor sentiment to keep growing here. So, I'm not all that concerned that the wall part of that framework is likely to be a big problem here immediately. The other part is what we call "the wallop." That's something big and ugly going wrong in the economy that people aren't already paying a lot of attention to. And I'll say, what gives me some comfort there is that while there are pockets of real optimism for the stock market today, I'd say there's still a lot of skepticism related to the economy. People are very worried about labor conditions. They've been very worried about monetary policy and inflation. A whole lot of things that have been on investors minds, which again, just lowers the bar. It means that if some things do ultimately go imperfectly in the economy, that that's not catching people entirely by surprise. So, there are some things we're looking out for, of course, that could go wrong in the economy. We are very mindful that recessions do happen. We're not done with business cycles by any means, and if we do get one, that's not a great thing for equity markets. But today, as we look at the different segments of the economy, all looks to be reasonably healthy to us.