Fisher Investments' Founder Discusses Current Market Valuations

Title screen appears, “Fisher Investments' Founder Discusses Current Market Valuations”

A man appears on the screen wearing a navy suit, sitting in an office in front of a fireplace.

He begins to speak.

A banner identifies him as Ken Fisher, Executive Chairman and Co-Chief Investment Officer, Fisher Investments.

Ken Fisher: I really can't think of a month where I'm not asked what do I think about market valuations.F And mostly in an overarching sense, I always think the same thing about market valuations, which is years ago I did the statistical work which I've redone multiple times since, showing that value have never been predictive of where stocks will go in any time period that almost anyone gives a hoot about. That is if we think about returns on a three-month, six-month, one year, three year, or five-year basis, valuations are just not predictive. Valuations may make you feel afraid, they may make you feel comfortable, but those kind of feelings are not really very powerful for where stocks go.

Ken Fisher: For every level of high or low valuation metric, whether it's price to earnings, price to book, price to dividend, price to sales for the market, there's a comparable level of the reverse with the same positive and negative return attributes afterwards. That's really hard for people to believe, because the way we think, we think like, if I'm up high and I fall, I'm going to get hurt more than if I'm down low and I'm falling so high, valuations must be riskier. There's no actual evidence to show that that was ever true. There's a very convoluted formulation known as the Cape Schiller PE that's convoluted at best and shows a below average return when you use its convoluted valuation, but doesn't show a negative one.

Ken Fisher: And in fact, most of the last now 30 years, it's said the market shouldn't be going up when the market actually has been going up, although there are brief periods of time where it's been right, which is true of almost everything. What I want you to see is that if you're really very concerned about it, you should note that right now the PE is not very high for the market by historical standards, 15 for the US market.

Ken Fisher: And the way I would have you think about that, and I am not telling you that that has anything to do with where its stocks go next month, next year, or three years, or five years, because it doesn't. But that PE of about 15 is one divided by 15 if you flip it on its head into an earnings deal. When you do that, that's what you would have if you bought the whole thing as if it was a private business. And at this price, you'd get one 15th and earnings coming back at you every year or 6.7%. And compared to bond yields, that's pretty good. Compared to most other things, that's pretty good. It's lower than the current inflation rate, but the current inflation rate is very high compared to what it was even a few months ago and may not be this high for very long.

Ken Fisher: That earnings yield is pretty good earnings yield, most people would be happy with that if they could get it without the volatility of the stocks you can't get it without the volatility of stocks, But the fact of the matter is, that still doesn't tell you where stocks are going to go in the next one month, six months, one year, three or five year, The valuations aren't predictive. Other things are predictive, I'm optimistic. I'm not optimistic with evaluations, but by the same standard by which most people think valuations are high, they're actually not. That might make you feel good. Thank you for listening to me.

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A series of disclosures appears on screen: “Investing is 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 investment 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 here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

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