Personal Wealth Management / Expert Commentary

Fisher Investments’ Ken Fisher, Answers Your Questions on Market Breadth, Banking Concerns and More

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher answers viewer mailbag questions about narrowing market breadth, the strength of the US banking system, declining money supply (M2), growth stock leadership and if the current interest rate environment is favorable for fixed income. Ken offers his take on these topics in this month’s viewer mailbag.

Transcript

Ken Fisher: Any recent thoughts on leadership within the market? We're now seemingly seven months into the new bull. With inflation coming down, traditional yield curve should be flattening. We'd love to read or hear your update on your thinking here. Well, since the bottom of the bear market in end of September, beginning of October, growth has been leading value.

Every month I get questions sent in and then I talk about them and I always talk too long, so I'm supposed to talk about these really fast. I'm never able to talk about anything really fast. But I'll do the best I can.

So the first one asks about are you concerned about disproportionate amount of money flowing into the mega-cap stocks? The equal weight S&P 500 has significantly underperformed the overall S&P 500—which is cap weighted, therefore, the biggest stocks have the biggest impact. Could this flight to quality be the market warning of some caution ahead? That fear is a common fear, and it's actually one worth paying attention to and watching. I don't think it's something to overly worry about here and now. Let me put that into perspective. The fewer stocks that lead the market up is a phrase that otherwise is thought of as the market having bad breadth. A low advance decline ratio. Train being pulled by an ever weaker engine, so to speak. The reality is that it is normal for that function of narrowing breadth to occur as you move toward a market peak. But sometimes that goes on for a long time. The other feature that I'd point out is we had a lot of that before we hit the 2020 and then 2022 peaks, while we got more of it after the bear market in between the 2020 bear market. In the 2022 bear market, what got hurt the most? The mega-cap stocks. You've probably heard me before talk about the bounce effect, where the categories of stocks that get hurt the most in a bear market typically bounce the most early in the subsequent bull market. In this case that was to mega-caps led by Tech. How much more does that go on? I don't really know, but I'll tell you what normally happens and what I'll wager will happen this time. Normally when you've had a bull market peak leading to a bear market and mega-cap— the biggest stocks—head, foreshadowed if you will, that peak of that prior bull market leading into a bear market. In the bounce back that continues as it has been this year, where the mega caps increasingly lead the way, the same names. Until you hit new all time highs for a fairly sustained period of time so that the bull market has justified itself in all time highs. And we're a ways away from that yet. So I wouldn't worry about it too much yet. What I'd suggest you do is write me about it again after we've hit that level.

I've listened to your comments earlier this year saying the bank system is sound. Can you please update your comments? A lot of concern in the news media lately. Oh, yeah. The media has made much about bank failure. I've talked about this in quite a few places on television, in some other videos. But the fact of the matter is we have 12 Federal Reserve districts. We did have some bank problems. Signature Bank in New York, Silicon Valley Bank and Republic Bank, particularly with fears about Pac-West that were never realized. When I say never realized, no bank failure there. Actually, Silicon Valley Bank and and First Republic weren't technically failures. The FDIC stepped in and had them taken over before they became failures. The FDIC took control of them before they became failures. They did not fail on their own. But be that as it may, and without wanting to get into too much detail. Weekly, there is good reporting, accurate reporting, on emergency borrowings from each of the 12 Federal Reserve districts, and they only went up markedly in the district, the San Francisco district where Silicon Valley Bank and First Republic were. And in the New York district where Signature was. In the other ten, they didn't go up at all. Which tells you it wasn't a systemic problem. Those numbers are still coming out weekly. It's still not a problem. Periodically we will chew this cud as some little headline comes up and people revert to not learning the lesson that there really wasn't a banking crisis. There were some banks that got into trouble. We have 4200 plus banks. Literally and I'm just going to say this simply. You go back to 1976, on average, we have 60 bank failures a year. The only years with no bank failures at all were 2021 and 2022. We've had few years with fewer than four bank failures. What's gone on this year wasn't particularly exciting, but it was not as extraordinary as people want to think it was. So the answer is yes. Banking system is sound based on assets, relative liability, cash flow, relative short term liabilities. The banking system's balance sheet is almost as stronger. Not quite, because the rise in interest rates last year has made it weaker than it was. But almost stronger than it's been in the last 10, 20, 30, 40 years. Don't worry about the banking system overall.

I understand you've highlighted huge M2 money supply growth as a driver of recent inflation. I didn't quite say that. With money supply growth turning negative now, is that automatically a recessionary signal? No. Let's just think through this. Let's just parse it. Money supply growth is a force in inflation. It's not the only force. What really is important, as I've said repeatedly this year, is loan growth. Loan growth. Loan growth. Loan growth. While M2, a measure of money that's been around since I was a young man. Actually, when I was a teenager is when people first started the designation of M2. Money is whatever people use to engage in transactions. Money, and all money is something that helps lubricate or facilitate transactions so we're not bartering. Now, today, as opposed to when I was a young man, and money was basically M2, which was cash, checking accounts and savings accounts that could be transferred into your checking account so you write a check. Before that M1, just cash and checking accounts. This is the way people engage in transactions. Now, there are so many near monies that we have M3, M4, and Lord only knows what people think money is that they have that's liquid that they can transfer into something that they can buy something with on their digital app. Therefore, I don't think it's as important as it used to be. What's really important is the loan growth and loan growth continues pretty well. Loan growth is down a little overall from where it was at the beginning of the year when it was running 12% year-over-year. But it continues pretty strongly. GDP growth continues. Loan growth helps stimulate economic growth. And in the so-called banking scares, the so-called banking crisis, small bank lending held back for a little while as small banks sort of went "ah!" But actually has now picked up again and small banks are lending aggressively as they were before the so-called banking crisis. And therefore, no, I don't think it's the problem that people fear.

Any recent thoughts on leadership within the market? We're now seemingly seven months into the new bull, with inflation coming down, traditional yield curve should be flattening, which would favor growth over value. I remember in one of your books, I think The Only 3 Questions That Count, growth should outperform value as the yield curve flattens. Yield curve meaning the spread between long rates and short rates, where short rates are above long rates, creating a so-called yield curve inversion. Since normally short rates are below long rates. We'd love to read or hear your update on your thinking here. Well, since the bottom of the bear market in end of September, beginning of October, growth has been leading value. And in fact, short rates have continued going up relative to long rates— long rates have actually come down since the beginning of October—and the yield curve is more inverted than before. But as the yield curve would hit some point down the road where it would start to become less inverted and move toward its normal shape, where long rates are above short term interest rates, you would expect to see that to continue to favor growth stocks. Why? Because growth stocks have multiple sources of financing capability, whereas value stocks are really quite bank financing dependent. And the reality is, if you think of it like pigs at a food trough. You got a big food trough and they throw a bunch of slop in there for the pigs. The big pigs push the little pigs out of the way to the extent that there's only so much room. And so as the yield curve inverts, that makes the banks pickier in their choosing on who to lend to. And normally that pickiness says, let me lend to the ones where I have the least risk. Who are the ones you have the least risk, the highest quality, biggest companies. Which is typically the high quality growth stocks, which is what's been leading the market since the beginning of the bull market last October.

With interest rates at multi-year highs, is now a good opportunity to buy fixed income? Well, let me just say fixed income is A or B. I mean, are you talking about short term debt? Well, that all depends on what the central bank does next. Or something about long term debt? Well, actually, long rates peaked last October and have been falling irregularly since. So when long rates fall, the price of long term interest go up. Excuse me. The price of long term bonds go up. And in reality, that's been good since October. But if you say since October when that happened, of the price of bonds gone up more, plus the interest rates you get on the bond, or if stocks gone up more. The answer is stocks have gone up more. And normally during a time like this when you would expect long rates to fall irregularly over time as inflation has come down, you'd expect stocks to do better. Does that make fixed income a bad buy? It depends what your purpose is. The reality is there's a lot of reasons why someone might own fixed income that have nothing to do with total return. You've got liabilities coming up. You want to match them against assets. Fixed income is great for that. But is this a spectacular time for real total return on fixed income relative to other available alternatives? Probably not. Long rates aren't that high. Long rates ten year US government rates at 3.7. They're just not that sky high. So the answers to the question is sort of, sort of not.

Again, I always love these questions sent in to me. Thank you very much for sending them. I look forward to answering more of them next month. Feel free to keep sending them in. And thank you for listening to me and I hope you found this set of questions educational and useful. Thank you. Talk to you next month. Subscribe to the Fisher Investments YouTube Channel. If you like what you've seen, click the bell to be notified as soon as we publish new videos.

Disclosure

A series of disclosures appears on the screen “Investing in 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 Investments 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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