Fisher Investments’ Michael Hanson on US-Iran Developments, Defense Stocks, IPOs and More

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Michael Hanson:

Well, hello everyone, My name is Michael Hanson. I'm privileged to be a member of our Investment Policy Committee here at Fisher Investments, and I'm here to answer your questions. I'm going to get to as many as I can in rapid fashion, let's get going.

Can you provide Fisher's thoughts on recent US-Iran developments?

Well, of course, at Fisher, our number one job is not to think like the consensus. So, let me say some things to you that might be out of the consensus. When we talk about the stock market and its reaction to conflicts as this, there's a few things you want to think about. One, while everyone focuses on the strait, I advise you to focus elsewhere. What's happening in real time is that the Strait of Hormuz is becoming less and less important than it was just months ago. It's the same thing that happened with the Ukraine-Russia conflict, It's the same thing that happened with Covid. When you have a major potential supply chain disruption, the focus is on that area, and guess what? The economy, the capital markets, are resilient and adapt. Already, there's been all sorts of alternatives going instead of through the strait to other alternative pipelines, going to other places in the world, such as Venezuela, such as the United States, in order to get oil and natural gas. So, that's the first thing. Look elsewhere, not right at it. The second thing is that this conflict, as tragic and heinous as such conflicts can be, has played out archetypally the way these things tend to do, at least for the stock market. One, when you get a regional conflict that includes energy, the first thing that happens is people start to get anxious— you can see the stock market start to become choppy. Then, as the conflict begins, we price in the worst-case scenarios. That happened last year with the tariff scenario, that's happened this year with the Iran-US conflict. It happened with Covid, you can see examples of this, on and on. But once you get to that point, this is the part that most people struggle with— the market goes up. In fact, it's probably going to be reaching towards new all-time highs, just like it did this April. Why? Because even as the conflict continues going forward—because still, at least as I'm recording this, we're still having the blockade of the strait—markets already moved on. It has a tendency to do that. Even as the conflict goes on, the market will move on faster. It's already thinking about the future. One of the ways we know this is that if you look at oil futures, for example, because people are always hedging their oil activity. Oil is part of the fundament of the economy, and so, people are constantly hedging their oil input needs. Well, if you look at an oil futures curve, yes, it's priced higher today and in the next several months, so, we think that oil prices might stay high for several months yet, but as you look at that curve going through time, it's coming down. And what that's saying is that the market recognizes that this disruption does not last forever; alternatives are already being created; and the market is adapting, as well as the economy. So, I want you to keep those things in mind. Last thing though, is that in the midst of all of this, we're in a presidential second year and this is going exactly like presidential second years go. The first half of a presidential second year tends to be choppy. It has corrections. It even has a few bear markets. We didn't quite get to a correction. We only got down about 9.6%. 10% is usually the threshold for a correction. But certainly we had a swoon and then a recovery. That happens a lot in the in the first half of a president's second year. Expect more chop—even though we've recently reached new all-time highs, we'll get more chop. As we get into the latter half of the year, though, and we get to the midterms, and almost guaranteed gridlock for US Congress, that is one of the most profoundly positive moments in stock markets. That last component of a president's second year. That's all right ahead of us. And in fact, this year's conflict, even with the tragedy of the Iranian war that we have still playing to form.

Is now a good time to invest in military defense stocks given the geopolitical landscape?

Well, you tell me. You know, I have people ask me this all the time. And so, let's just triangulate around a few things. Is now a good time? Well, did you predict all the wars and conflicts that were going to happen and when they were going to happen beforehand? Of course not. They were fairly surprising, even the one we're currently embroiled in. I don't think a lot of people necessarily had this one on their bingo card for this year. So first, our lack of ability to anticipate these things ought to tell you a little bit about our lack of ability to anticipate what the defense stocks are going to do. And so let me put it to you like this. Perhaps there still are some great opportunities, I don't know. My job for you is to try to know things others don't, and to try to take advantage of that opportunity for you. When it comes to defense stocks, what do we know that others don't? Not very much. Right now, the expectations for defense stocks, whether that be in Europe, the United States or elsewhere, are sky high. Everything is about relative expectations. If we think those stocks are going to do even better, they need to surpass those very high expectations. I don't know if they will or not. Going back to what I said previously, I can envision scenarios, in fact, where conflicts resolve themselves very quickly. And suddenly, 12 months from now, we actually don't have much of any conflicts going on like we did before. That could happen. If it does, those defense stocks also go down with that, most likely. Another feature about defense stocks is that what you're really looking at is defense contracts— what are the particulars of those, how long are they, when are they signed, for how much—so that the revenue is booked and mostly locked in, regardless of when the conflicts happen and so on. In addition to that, then though, with the defense companies, it's a matter of execution. How does each one execute? You've got to know all those things, and you've got to know it better than the market. To me, it's a very erratic category that everybody's speculating on at the moment, and in fact, certain defense stocks have even taken some steps back this year.

Energy prices are up this year—does Fisher expect this to drive global inflation and slow economic growth?

Maybe a little tiny bit of both of those, but not much of either. Oil does not cause inflation, high oil prices don't cause inflation. What causes inflation, over the long haul, is the overall aggregate amount of money in the system, the money supply. That will drive inflation over the long haul, not individual pieces or prices. Where we are today is a place where money supply growth is positive, good globally, but nothing that's overheating, and relative to GDP growth, which ought to come in at around 3% globally this year, certainly nothing that's going to drive a ton of inflation. Instead, what higher oil prices do is displace and change. Oil is relatively inelastic, which means that you're going to probably use about the same amount of it, regardless of its price, more or less. So, what do you do in the face of that? Well, if you're a consumer who's getting squeezed, what you're probably going to do is then change your behaviors a bit, but not as much as you might think. You know, if you go back 40, 50 years ago, when energy was a really large part of the global economy, also a really large part of consumer behavior and their discretionary income, high oil prices took a big hit. But over time, and we've shown you this at Fisher Investments many times, the oil intensity of the economy and of individual consumption has come down and down and down. And as a result, even with a big flip in oil prices, which then results in a big flip in things like gasoline, not to mention other inputs, doesn't quite have the same big effect it used to 30 or 40 years ago, simply because energy is just not as big a component of the economy, nor spending as it used to be. So, what does it really translate into? Well, we wrote about this for you earlier in the month on our MarketMinder website, showing that, in fact, consumer spending in April was completely fine. It was just something of an adjustment, a little more on gasoline, a little less on other things. It comes to trade offs that are actually relatively small in that calculation, not enormous. So, as we think about this, even though oil seems like such a big deal because it's in so much of what we do, remember that it's intensity of the economy is not what it used to be, and as a result, it's not going to create these huge whipsaws in the economy like we're used to seeing 40 years ago. Things are much more stable than that.

Are Europe and the UK's energy challenges affecting Fisher's outlook for non-US stock leadership?

No, and believe it or not, maybe the opposite. Here's something interesting. First of all, Europe has led all year and it continues to lead this year. Out of the bounce from the correction it's lagged a bit, but those stocks are still leading. Why? Well, I think it's all about relative expectations. Expectations for Europe's economy have come down as a result of this conflict, but do you want to know what is crazy? In fact, expectations for earnings in US and Europe have gone up since the conflict began. People simply can't fathom this. Europe has much more resilience than people realize. I've heard a lot of people tell me, Isn't Europe cooked? Doesn't it have a big problem here because of these oil conflicts? And won't it not be able to get jet fuel and all the rest of that? And the answer is, there are some jet fuel shortages. But by and large, Europe has adapted, been resilient, changed itself a lot since the conflict between Russia and Ukraine started. Once upon a time, they would get a lot of natural gas and oil from Russia, and actually, quite a bit from the Middle East as well. Now, they get most of their natural gas and oil from Norway and the United States. In fact, Europe is much better supplied with these things than people realize. And as a result of that, their position is better than people realize. And what we look for you at Fisher Investments is not the thing that everyone's just looking at and focusing on, but the areas that people just simply don't want or don't like that actually have great opportunities. Europe is that thing. It's not that Europe is going to grow better than the United States. It's that expectations for Europe are so low, they're going to quite easily surpass those. And when that happens, that's how you get excess return in a stock price.

With several high-profile firms expected to go public this year, what is Fisher's take on IPOs?

Are you concerned about new equity supply? Well, it is a good question. And yes, we are concerned about equity supply. At the end of the day, for all the economic theorizing and all the ideas we have about capital markets, really, truly everything comes back to supply and demand. The equilibrium between what is supplied and what is demanded. Stocks are that way too, even though it seems a little abstract, still supply and demand. So, if you were to have demand here, and suddenly, by way of IPOs, raise the supply by a lot, what happens? This is economics 101. The price comes down. The equilibrium price, all else equal, comes down. So, it's a question of magnitude— what happens and how does it happen. Usually, when you have high IPO activity, it tends to be a little more late in the cycle. It tends to be when people are optimistic. I started my career as an investment banker, and I can tell you that we sell things and bring them to market when people want to pay high prices for them. And that's precisely where we are today with the technology sector. But when you add all that new share supply, it can depress the prices. So, what do we have? Well, we need to watch and see what happens. First of all, are they really going to go through with these IPOs? Because they've been talking about them for years. I think SpaceX looks pretty poised to do it, others do as well, let's just see. The second piece, though, is how much they float. And this is the part that's not discussed as often— a company doesn't just go public and sell themselves totally to the public. In fact, what they do is sell a percentage of shares to the public, what they call a float. How much do you float to the public? This could be anywhere from 5% to 50%. We don't know. We know that the capital needs of these firms are probably not to the tune of needing to sell half of them. So, we want to see how much is really being sold. If it ends up being tiny, it may not change the market much, or if it ends up being bigger than people expect, that could be a lot of supply. But the crux of it is this: All of it is a piece of a piece with the idea that we are underweight technology, and it's not because we think technology can't do great. Those are some great firms with some great earnings, a lot of them. But the fact is, expectations are just too high relative to their truth. Here's something I was touting internally to our investment counselors just a week ago. For the last 3 or 4 years, industry estimates for how Tech would do were higher than how stock market analysts felt they would do. So, the industry thought it would do better than the street would. That was a great setup because the industry tends to know a little better than the stock market analysts do, and they were right. Tech outperformed, exceeded expectations. But where we are today, 2026, it's flipped. Industry expectations are still quite high for growth, but street expectations have jumped above that. Expectations are too high. They love to sell you an IPO, when expectations are too high because you'll pay too much for it. But for us, we go away from those things towards the areas where the focus isn't, and all the ebullience isn't, into areas where we know there are great opportunities relative to expectations. IPOs demarcate that like few other issues can.

What will Kevin Warsh becoming Fed Chair mean for monetary policy and the bull market?

Very little. Fed Chairs, Central bank heads, in general, do a lot less to affect things than people realize. We tend to ascribe a lot of importance to these people because they're individuals that seem like they're in charge of something. You know, we often talk about the Fed being in charge of the economy or the president being in charge of the economy. This, of course, is nonsense. It's a global world with global interest rates and global everything. The US is a big component of that, of course, but the Fed Chair, regardless of whom it is, has a lot less impact on that than people think. Now, taking the man himself, Kevin Warsh. Well, I'll tell you my frustrations. We've got another lawyer getting into this public policy scene, and another central bank head that's never ran a bank, ever. Now, in Mr. Warsh 's defense, he's been an M&A banker. He's also been involved in other presidential issues, he's done things like helped set policy during the Great Financial Crisis. So, he's very experienced, and this is a very smart man. But one thing that Ken Fisher always says is that you think you know who you are. People think you know who you are. But when you get into a position like Fed Chair or president or whatever it may be, you're going to be different than you thought you were. That role, that situation, will make you behave different than you ever thought you did. In fact, Fed Chairs famously said this. I used to think this and that, I had all these theories, but when I finally got there, it was all off and I had to figure things out anew. That'll be true for Mr. Warsh as well. But note he's been known as a centrist. In fact, his policy views have been at odds with President Trump frequently. He's also been someone that's known to be pretty collegial and able to work with the rest of the board. And let's keep in mind that he is, yes, the chairman, but one one voting member and he can't control everything. So, my advice to you, even though people never take this advice, is that, don't even pay too much attention to it. Yes, watch what they do. Forget about what they say and forget about putting so much emphasis on these folks. They set interest rate policy very narrowly for a very narrow component of the economy.

Do private credit concerns pose a risk to the broader financial system or bull market?

This is a question that we've put a huge amount of effort into over the course of, I would say, about the last year. Our primary concern is this: over the last 20 years, it's become harder and harder for companies to go public. It's just very onerous. It's very bureaucratized. And so, firms don't go public as often. Instead, they've sought means by private methods. And that's really, at least the last 15 years—to me, more like 20 plus. So, there's been a lot of private activity, a lot of private loans, companies haven't been going public as often, staying private, getting debt facilities, all this kind of thing. Tech has done a ton of that now. Our concern is just the simple concept that if you had too many of these loans go bad, even though they're private, how do you shore those up? Well, very often in panic and crisis situations, you have to go sell public assets of whatever you can because they're liquid. You can sell them on that day, that's part of the beauty of public assets. And so, you have to go sell your public assets to cover the losses on these private assets. That's what we're concerned about. Fortunately, we don't see a lot of signs of that. What we do see some signs of is a few impaired assets. Otherwise, most things are okay. And so, I think the way to think about this relative to what the businesses are and what's really implicated here is that, when you get right down to it, a big problem with the private credit-private loan world is that a lot of these have been technology, specifically, software loans. And this gets to the heart of the problem. You may even have read about this, the so-called SaaS apocalypse—software as a service, SaaS. And you have a lot of folks saying, we have all these private loans for these software companies, but AI is disrupting all of that. It's actually going to really impair the future of a lot of these software companies, because AI is just going to take them over or do their work better. And as a result, we're going to have these huge losses in the private loan industry. That will be true to an extent, but it won't be uniform or blanket. And so, let's just talk this through for a moment. One, AI will make some software companies do great. They'll utilize it great, get ever more customers. AI will make other software companies do poorly and perhaps even go away, and some of those loans are going to have to be written off, that'll happen, too. What this is really all about, at the end of the day, is not about steep losses and software so much as it is what you would call a classic liquidity mismatch. Software companies only last 3 to 5 years. In fact, many of them last less than that. And yet, you have loans on these books that might be at least that long or longer. What it means is not necessarily so much that all this money is going away and it's going to zero. What it means, rather, is that a lot of this money that was once high-powered money, getting a good return on these big software companies, is now becoming dead money. It's just not offering a return. It's sequestered. And in fact, people may not get their money back for a long time. And you're seeing that—people requesting redemptions, but not necessarily getting them. That's all of a piece with private investing. It's one of the real difficulties with private investing. On net, though, we see no mechanism that will infect the rest of the world, but we do see some individualized difficulties there, and we see a world where private assets are going to have to work through their difficulties for some time.

What lessons from past market cycles are most relevant for today's investing environment?

As always, we cannot simply take the past and extrapolate it into now or in the future. The reason we study the past, one, is because we are looking for context and precedent. You know, I cannot tell you, in today's media environment, how many people say things like this has never happened before, or this is unprecedented. And the answer is, almost nothing is. Even just in the 100-plus year history of stock market data that we have that's really good, you can observe things that people just really never knew existed, but did. And so, the first thing is precedent. The second thing is human nature, human behavior. Because even though today is different, in a lot of ways, it's also the same. It's the same type of human mind, especially the collective human mind, that encounters these types of difficulties. And even if the problem is slightly different, you'd be amazed how often humans react similarly to a similar kind of problem. And so, history really reveals that for you. When we think about this year, though, there are parallels to the past, and then there are slight differences. But the parallels have been very strong. The first one that I've been speaking about throughout this mailbag is that, in fact, when you have a regional conflict that features an energy crisis, such as it is, you have this part where you get something like a correction, but a rebound much faster than people can anticipate and the market looking past and beyond the conflict. That clearly has happened, and that's true to form. You can look at regional conflicts through history and see the stock market react that way. The second piece is also one we've discussed, which is the second year of a president's term, what we call the Midterm Miracle. That presidents, which have most of their political power in the first two years of their term, almost without exception— there's only two exceptions in history—lose power in a midterm, become less powerful, and if they're in their second term, become, often, lame ducks. That is right ahead of us. And whether you like that or don't like that, depending on your ideology, stock market loves it. And so, one of the strongest patterns we can observe about this year is that the second half of this year, particularly the fourth quarter, on the wings of the Midterm Miracle and that gridlock that absolutely, I think is probably coming, you know, depends on who you ask, but it seems to me, Congress is going to tighten up and that the Democrats have a real good chance of taking at least one chamber. That could change, but that's what it looks like today. Those two patterns, regional conflicts and Midterm Miracle, describe an enormous amount, not only of what's happened already this year, but how we anticipate the rest of the year to go on. As I said, though, there are differences between now and then as well. We need to study those carefully. Where are we in the cycle? Well, in fact, we're in the fourth year of a cycle. This is starting to get a little long in the tooth. You know, you do have bear markets that can creep into these situations. We're remaining ever vigilant. But for us, what we see is a world where conflict and strife has lowered the expectations of the world for the economy and the stock market, and yet, things have remained more adaptive and resilient than people can fathom. That's the fuel for a bull market. And so, all else put aside. 12 months from where I sit today, I see stock prices higher, and we want to try to take advantage of that for you.

Well, thank you so much for these questions. You know, we do enjoy answering them. It's part of what we do at Fisher Investments. We'll be right back the next month with another set for you. Take care.

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