Personal Wealth Management / Expert Commentary
Ken Fisher Debunks Rising Long-term Interest Rate Fears
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses a recurring investor inquiry about how rising interest rates might impact stock markets.
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Ken Fisher: So right now, we get a lot of people pretty concerned about inflation, long term interest rates potentially rising with inflation. Ironically, of course, stocks are prepricers of all widely known information, facts, widely known opinions and all these kinds of things
Ken Fisher: I mean, there's almost nothing that people pay a lot more attention to. There's things, but not many that they pay a lot more attention to than what do they think is going to happen to interest rates and what do they think is going to happen to inflation.
Ken Fisher: So that tends to have little market impact. And in fact, in history there is little market impact to this. Rising rates do not have a predictable impact on stocks that you should be prepared to bet on. Rising rates coupled with other things might, but rising rates by themselves, no. Now, the concept behind rising rates being a negative impact to stocks is a somewhat valid theoretical one. The value of a business is supposed to be the net future earnings, cumulatively discounted back to the present by a valid interest rate.
Ken Fisher: That's the right interest rate. And so, if interest rates go up, that means that the discounter would be a bigger number and the present value of that future earnings stream would be less. And there's other things, equal validity to that concept. Other things are never equal and there's always multiplicities of factors going on all the time. Hence no one thing is ever the singular force that drives stocks. It's always this multiplicity of things that could be this, could be that could be the other.
Ken Fisher: But the fact is that rising interest rates are often paralleled by other forces that could be positive or negative. And there's not an overwhelming feature in history showing you that rising interest rates are good or bad for stocks. People will not accept that for another parallel reason.
Ken Fisher: One of the things that people believe is that high valuations should foretell worse stock futures than low valuations. And so, when the market's got a high historical valuation, they tend to be more pessimistic than if the market has a low historical valuation. And I was just telling you that rising interest rates should discount the present value of future earnings stream, more lowering the valuation.
Ken Fisher: But when we actually look at the history of both valuations and also interest rate adjusted valuations, there's no actual and people will not believe this, you probably will not believe this, but it's true. There's actually no correlation between valuation levels and subsequent stock market returns in any period that a normal human being really cares about. And by that, I mean the future. Three-month, one year, two-year, three year and five year returns basically show a correlation coefficient statistically documenting the tenacity or the force of one to impact the other. There isn't any. It's effectively to a rounding error always very close to zero. There is no correlation between valuation levels and future earnings returns until you get out to some very convoluted ways to calculate valuations and ten-year returns.
Ken Fisher: And even then, it doesn't tell you up or down, it just tells you above average or below average future returns ten years later. So, my point to you is, and summing up now, people tell you that rising interest rates should be bad for stocks, but in fact, that's not measurably true at all. And when you have people tell you something is true over and over and over again, and you can see this widely in media today, widely on things like CNBC and what have you, when you hear this over and over again, you know it's already been priced and therefore you know it's actually wrong. Thank you very much for listening.
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Ken Fisher finishes talking, and a series of disclosures appears on 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 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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