Personal Wealth Management / Market Analysis

Fisher Investments' Founder Explains What Interest Rate Hikes Mean for Stocks

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher explains why interest rate hikes from the US Federal Reserve (Fed) should likely not be a cause of panic for stocks. Markets take all widely known information and incorporate that knowledge into stock prices. For interest rates, the stock market closely monitors central banks and their policies, so this information is rapidly pre-priced into stocks.

Ken says that slight rate hikes, historically, have not negatively affected stocks long-term because of this pre-pricing action. Essentially, Ken explains, by the time the rate increase happens, its power to surprise markets over the long run has evaporated. With all of the information available, Ken believes the interest rate increases are likely not a cause for concern.



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Ken Fisher doing hand gestures time to time explaining.


Ken Fisher: So, this year, like a lot of other years, there is just an excess phobia about central banks and raising of interest rates. There is a very widely held view, which is basically a mythology, that Fed hikes kill stocks, that rising long rates kill stocks, that the Fed starting to raise rates to fight inflation is going to kill stocks. And I'm just going to tell you that all that's just nonsense. It's just mythology. It's not real.

Ken Fisher: We have a long history of long rates. We have a long history of stock prices in America and around the world. We have a long history of central banks having initial interest rate hikes in a cycle as well as ones where they've risen once, twice, three, four times.

Ken Fisher: We don't have any real history of them raising in developed world a lot of times, but 1,2,3,4 in a cycle, sure, lots of those. And we can say that from the initial hike, 6, 12 and 24 months later, stocks tend to be positive. We can say that rising long rates correlate not negatively with stocks meaning that long rates go up, stocks go down, but positively with stocks, meaning that long rates going up is actually associated with stocks rising, not falling.

Ken Fisher: Not overwhelmingly. The correlations are not overwhelming, but they are exactly the reverse of what people think they are. There is this part in our bones often and regularly where we believe things should work a certain way, but when you actually go back and look through history, they have not, and yet not many people do it. So, we revert as a culture to thinking they work that way. How does that work immediately in the stock market?

Ken Fisher: It means that this year as it started and there's been all these fears associated with the central bank raising rates probably starting in March, maybe 1,2,3,4 times, who knows? Oh my God, that that will lead to decimation in the stock market. But those fears are in stock prices now.

Ken Fisher: Markets pre-price all widely known information, including facts and opinions and all of that is in stock prices now. It's the reason why because there's very little that's a lot more widely watched than central banks, including our US Fed. It's the reason why short rates, initial hikes and initial few hikes have never decimated, I don't want to say haven't had volatility, haven't been known to be decimating to stocks. There was an age old saying, not age old, that's wrong, I misspoke myself.

Ken Fisher: There was an old saying when I was young that was common among market savants started by Edson Gould, called Three Steps and a Stumble. And it was of the view that if the Fed raised rates three times one, two, three, that after the third-rate stocks went down and for a period of time from the 50s through the 70s that seemed to work.

 Actually, before that it didn't. And it hasn't since. And there is no magic to this notion because markets pre-price the fears.

Ken Fisher: So, with that, I just want to say to you that this is a subset of a bigger issue. When you see everybody focused and worried on a particular thing, you shouldn't worry about it. They've already done it for you as it relates to stock prices. You should walk out someplace somewhere and find four or five people that are worrying about this thing and thank them for doing the worrying for you, so you don't have to worry about it. They make your life better. Stocks pre-price those worries. You can count on that. Thank you very much.


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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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