Personal Wealth Management / Market Volatility

Fisher Investments’ Founder Explains How To Navigate the Current Bear Market

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses his thoughts on navigating the current bear market. Ken says it is normal to consider changing your portfolio positioning during downward market volatility. Making changes or staying put at this point, he says, should largely depend on how your portfolio holdings are positioned to capture the upside once a bull market resumes.

Ken explains how categories that suffer the most during bear markets tend to fare better during market recoveries. In today’s bear market, growth stocks consistently get hit hard on down days and perform better than the broad market on positive days. Ken says this is a sign that growth categories may be the best bet for the coming recovery. He also reminds us that bear markets tend to bottom relatively quickly after crossing the -20% threshold—the median timeline is about one month. Given this market’s drop below 20% on June 14, Ken says now may be the time to position your portfolio toward growth stocks to benefit from the impending rebound.

Transcript

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Ken Fisher: In a volatile market environment and particularly negative volatility like we've had throughout 2022 to date, it really is normal for people to not get that sometimes the view should be don't just do something, stand there. Sometimes you should change what you've got and sometimes you shouldn't. Sometimes you make more money sitting on your hands than you do dancing on your feet. And it all depends how you were structured beforehand relative to what comes up ahead.

Ken Fisher: Now, let me paint a picture for you that I know to be true, that I know is effectively not seen by people not understood at all, and is a surprise waiting ahead that can impact how you should posture your portfolio or not, depending on how you're postured right now. If you think of this year as a whole, we have a year where there have been a great many fears, you can blather them off pretty readily: fears of central bank raising short term rates, fear of long-term rates going up anyway, fear of inflation, fear of recession, fear of things associated with Ukraine-Russian war, fear of things associated with COVID impacts in China and dislocations of the Chinese economy disrupting supply chain and other supply chain features including those going back to the Russia-Ukraine war. You can go on and on. In that, oh, and of course then things like the implosion of crypto, et cetera.

Ken Fisher: Normally in a bear market or a correction, correction being defined as a market off global peak or S&P 500 peak, that's down 10 to 20%, Bear market defined as bigger than that. Normally you've got one, two, three big scary stories and in the correction, they turn out to not be so true and people get over it. And the positive surprise move stocks back up pretty quickly or, it is real and takes a little time to work out and then it's a little bit bigger drop and you get bear market that gets worked through and then stocks go up. In this period there's so much confusion because there's so many of these things. I've made the analogy that this is a little bit like getting attacked by a swarm of bees. No singular bee sting hurts a normal person all that much. But when you get stung one after one after one, you just want to run. You just want to run away from those bees. And in reality, this goes back to my point about should you be sitting on your hands, or should you be dancing on your feet?

Ken Fisher: And in this year, and you can read this in the media almost every week in lots of major sources, this has been a year where there's a presumption that value is doing better than growth. And that's true, but it's also not true. Value is doing better than growth. If you take the categories from the beginning of the year, value is down, but not down nearly as much as growth stocks are down. And of course growth stocks are heavily led by technology. Value stocks are heavily led by energy and banks, then a little bit materials, then after that industrials. The high price of oils help the energy. High price of commodities help the materials technologies stocks doing badly has hurt overall growth because most of growth is technology.

Ken Fisher: But here's what I want you to see in a very, very high correlation. Every day where the stock market falls, value does better than growth. And often when it falls a lot, by a lot. Every day in the year when growth has done better, when the market's gone up excuse me, every day when the market's gone up growth has done better than value and when it's gone up more by a lot. That correlation is so high that it's telling you something. It's telling you that when we get to a bottom we can come back to when that might be. But when we get to a bottom and the market starts to go back up it will be growth that's leading, not value. And yet most people think they should be in value.

Ken Fisher: So, if you're heavy in value now you've been doing relatively well compared to the market you're down, but not down as much. You might want to switch out of that as you get to where we would have a bottom and move to growth because coming up the other side that would tend to be true. Now it is normally true that coming off the bottom of bear markets the category that's done the worst going down, the categories that have done the worst going down, tend to do the best in the initial months and sometimes longer. That would also be consistent with this.

Ken Fisher: Another point that I want you to see, however is, and I've talked about this in other places, but I don't think the world's as bad as people think it is. The big fears of a bear market that would be big and long would be associated with real big and long and lasting recession and I don't see that. I see those fears as false fears. Therefore, future positive, surprise, fearful, false factors always bullish. But moreover, we're in this period that I often refer to as the pessimism of disbelief, where all rays of hope are dismissed, and all views of negativity are aggrandized. When we look at a period where we've gone into a bear market, meaning the market global peak has been down and crossed from 20% over into down a little more and therefore officially into a bear market, to the time you've gotten to the absolute bottom of that bear market, hasn't been very long. The median time period of that is a month. The mean average time period of that's about double that. We crossed over that line in June 14. So therefore, one might logically expect that unless you expected a super bear market and then of course whenever I say that, people always say, yeah, but what about  1929-32 and you say that's an outlier exception that proves the rule.

Ken Fisher: For most bear markets, once you cross over that 20% down mark and you're officially in a bear market, it's not very long until the bottom. And in a period where we've been building this pessimism of disbelief that brushes off any rays of hope, you say to yourself, it's maybe about time to be positioning yourself for the upside. Once you cross over that 20% line, when you look at 6-, 12-, 24- and 36-month periods looking into the future, returns are overwhelmingly positive and double digits so, in each of those categories. Therefore, if you've been oriented toward value, now might be a good time to contemplate being more prone to growth. If you've been overweight to growth and tech, you're actually probably postured pretty well for the move that occurs on the other side, although you've probably been hurting just recently.

Ken Fisher: So that's how I view  should you be doing that? Let me take this one more direction. Should you get out? Well, no, because let's say I'm wrong and the market's going to keep going down longer. If you get out and go to cash, inflation is eating you alive in cash. Do you want to do that? Long-term interest rates are going up, so if you buy bonds, the price of bonds is falling. Do you want to do that? Low coupon on the bond, bond price going down, get a negative return on the bond, you want to go into crypto? Well, that's a wild speculation. Maybe you think you're up to that? If you think you're up to that, you don't need advice from me.

Ken Fisher: Maybe you want to try trading foreign currency this year. Overwhelmingly so, and I would guess don't know, moving ahead, the strength of the dollar makes that a very tough proposition. It's certainly been true all year to date. It's hard to go anywhere. That's why I've referred to this in public, on television and other places as a ghost busters' market, because who are you going to call? There's something strange in the neighbourhood and all these things going on that everybody's afraid of.

Ken Fisher: We can count them all. There's lots of them this time. No one of them is killing us. But they're all, oh, oh, oh, who are you going to call? And that's why I think the downside on stocks is likely to be less than people fear because there's not a lot of great alternatives to move to where you can maintain liquidity and expect not to get hurt and hope for upside when remembering that once you've gotten down into Bear Market territory, it's not that long in time till you go the other direction. Thank you very much 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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