Personal Wealth Management / Market Analysis
Fisher Investments' Founder Discusses Positive Fundamentals Everyone Is Overlooking
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher describes underappreciated economic drivers that could lead to a strong rebound in stocks sooner than many think. For example, robust loan growth along with the unwinding of COVID lockdowns in China—the world’s second largest economy—could drive higher economic activity and have positive effects.
Ken argues we are experiencing a low growth economy that many are confusing with recession. Ken says that, even with the recent Fed rate hikes, the 90 day-10 year yield curve is wider than it was in January—indicating a healthy lending environment. Additionally, a normalizing post-COVID economy and easing supply chain bottlenecks set the stage for potential upside economic surprise.
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Ken Fisher: in other places I've said that this world after six months of declining stock market, has had sentiment soured to the point where we've moved into this phenomenon, I call a pessimism of disbelief. That is predicated on a lot of yeah, buts and you bring up something positive and people's reaction to it is “yeah, but it doesn't matter. Yeah, but it doesn't matter. Yeah, but it doesn't matter.” And that becomes the springboard upon which the next rebound at equity prices are built. The pessimism of disbelief has been around for a long time, and I've written about it for decades.
The fact is there's a lot of positives going on. One of them is loan growth is strong. Loan growth is fundamentally people don't take out a loan if they don't have a reason to use the money. And despite the higher interest rates, loan growth this rippling along at about 8% a year. This is pretty robust. It's not killer, but it's pretty robust. No one seems to notice that some are contrarian positives. If Europe can overall engage in growth, which it is, at a time when it's suffering the biggest brunt of the inflation issues and energy issues from the Russian Ukraine war, if it can do that, then it's almost axiomatic that the world as a whole can't go into decline.
Lockdowns in China, tied to the resurgence of COVID are unwinding, as is true in Hong Kong, connected, of course. The features of that to the second biggest economy are inherently positive. “Yeah, but” people say, COVID may come back, and they may re-impose lockdowns but that's a yeah, but. And every positive is seeming to be met with a “yeah, but”. You have so many people that can't quite get the fact that capitalism is rolling on and we're actually having a low growth economy that people have confused with the recession.
The fact is, and this is basic and fundamental in my thinking at least, the yield curve spread between 90-day rates and 10-year rates, which is the only real yield curve that matters. Because banks are in the business of taking in short term deposits as the basis for making long-term loans, and that spread increases. Their future propensity to lend is wider than it was in January, despite the Fed's recent rate hikes in June. And despite what's expected in July and higher than it was a year ago, a point people don't notice because they “yeah, but” the Fed's going to raise rates.
Let me just go off on a tangent on that one for a moment, if I may. This increase in Fed fund rates by the Fed from its beginning is one that you can measure against ones in the past, and it's actually not that large. And ones much larger than this have never been met with bear market. I don't want to say that I misspoke that. It's not that they've never been met with bear markets. It's that there's no consistency of bear markets in their aftermath, and more times than not, they have not been met by bear markets.
The most recent example of that was in 2018, where the Fed ratcheted rates up and we had a correction that resumed into bull market with new highs soon in a V shaped decline at bounce back.
When we think about the global economy, a part that I believe to be underestimated is the degree to which we are now unwinding, not overnight, but at a fairly steady rate. The supply chain dilemmas that were extant tied to the aftermath of COVID lockdowns. And that creates a positive that, again, people are largely ignoring. These things that I'm talking about are ones that I think are perfectly measurable and no one really wants to see or hears about. The supply chain snarls other than the ones created by the Russian invasion of Ukraine, were ones that built and initially were overcome by the biggest firms who had the most buying power.
The analogy I would give you for that is there were the big pigs that could force the little pigs out of the food trough, and it's the little pigs that suffered the most. Smaller firms that couldn't get things coming out through supply chain big firms had first crack. As we've gone down over time, we're working down that size spectrum, and no one seems to notice that.
The reality, in my opinion, and I may be wrong, is that while everyone fears the Fed hikes will cause recession, and I'm not particularly in favour of what the Fed's doing, I don't think it's actually the way you should move to try to end the inflation. I think there's better things to do. But be that as it may, the reality of it is, while I see it as a negative, I don't see it as a big enough negative to do what so many people fear, which is to kneecap the economy into a full-scale, big recession. I don't think we'll have recession at all. I think what we've got is slower growth coming off the heels of the back part of 2021, where growth was pretty darn robust bouncing back from the COVID lockdowns.
So, with that, what I urge you to do is think through positives ahead and let me leave you with one that I think nobody thinks about. If you look at the current P/E of the US market, it's depending on exactly how you calculate it 15, 16, something like that. The way to think about that is to flip it on its head into an earnings yield, or one divided by 15, which gives you almost 7%.That's 2x ten year bond rate, except with the ten year bond rate, all you get is that. With the earnings yield, you buy it today, you get twice the return in earnings as if you owned a private business. If you owned a private business, that'd be a good spread and the earnings of business as the whole over the next decade will continue to grow.
But then think about that another way. So, take that earnings yield, one divided by 15, not quite 7%, And then you remember that on top of that there'll be some inflation, because businesses pass on inflation costs over time. A lot of you I know are worried about inflation. So, whatever you think that inflation number might be ahead, tack that number on top. And then there's with that the natural function that there'll be new companies or old companies thinking up new ways to do things that will improve earnings. What I mentioned before, and a little bit of GDP growth naturally over those ten years, and you say, which would you rather have? 3% tenure bond, four and a fraction percent corporate bond that has some corporate risk, or 6.5, 7% earnings yield that will become a bigger number moving forward with growth and some inflation and I think the latter is fairly compelling, the only issue is figuring out the timing when someone might want to get in, if they're not in now, or want to be clear that they shouldn't get out because of that as a positive that people don't think about moving forward. Thank you very much.
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