Personal Wealth Management / Expert Commentary

Fisher Investments' Ken Fisher Discusses How Stocks Would React to a Recession

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses how stocks might perform if the US economy falls into recession versus experiencing an economic “soft landing”—a scenario where the economy avoids recession and continues to expand modestly. Ken says some people falsely assume the only way stocks can continue to rise is with a soft landing, while a recession would spell doom for stocks. According to Ken, stocks move on the difference between today’s investor expectations and what the future delivers, with a better-than-expected future lifting markets.

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses how stocks might perform if the US economy falls into recession versus experiencing an economic “soft landing”—a scenario where the economy avoids recession and continues to expand modestly. Ken says some people falsely assume the only way stocks can continue to rise is with a soft landing, while a recession would spell doom for stocks. According to Ken, stocks move on the difference between today’s investor expectations and what the future delivers, with a better-than-expected future lifting markets.

Ken points out that a potential recession is currently widely-anticipated, which has significantly lowered expectations for stocks. With many expecting a large recession, the market may be primed for a positive surprise in the form of a minor recession or “soft landing,” a boon for stocks in either scenario. Ken says markets can still rise during an economic contraction if the downturn is less severe than most people expect.

Transcript

Ken Fisher:

So there's always agitation about how's the economy going to do. And in reality, of course, there's no certainties on those things. But in the period we're in now, there's a lot of talk about with so much anticipation of a recession, is it going to be a really bad recession? Is it going to be a so-called minor recession? Is it going to be a soft landing with no recession at all, but not robust growth? Or do we continue growing as we have been in recent quarters? Now, again, there's no certainty on any of that. It's all my opinion, your opinion experts, experts' opinion. But some people think you've got to have a soft landing or you can't have stocks do well.

Let me just put it in a simpler framework for you. Stocks move off of the difference between today's expectations and whatever it is the future brings. So if the future is better than people expect today, that'll help stocks go up. If the future is worse than people expect today, it'll make stocks suffer. That isn't very hard to understand. So the question is, what do they expect now? Now, as I have said and I wrote about first in my Christmas Day column in The New York Post, and then in my end of January column in The New York Post.

Going back last year, 2022. The most widely anticipated recession in modern, measured history. We've been talking about having a recession ahead since the second quarter of 2022, now over a year. And the views of that grew all year long and remained strong now, as we've had the so called March banking crisis. Now, in reality, which wasn't really a crisis, but that's for another video. In reality, we don't need a soft landing. We just need the recession to not be terrible because most people expect a recession and they expect bad. And sentiment is dour. And so if we had a recession that was minor, that would still be a positive surprise.

Would a so called soft landing, meaning no recession at all help stocks more? Sure. If there was not a soft landing but continued moderate growth, would that help stocks more? Sure. Let me put in an offsetting feature, however. I've written a lot about recently and in the long distant past. The phrase that I created decades ago called the pessimism of disbelief, which parallels the wall of worry that bull markets climb early on. As people can't get over their prior views of what was wrong and as things positively surprise, they say "yeah but, yeah but, yeah but, yeah but." Now the fact is, the stronger the economy is from here, the more you're going to see that pessimism of disbelief continuing, because it's just a hard pill for people to swallow.

That they were wrong and these big concerns they have didn't play out fully in the negative ways that they expected. What I want you to see from that is that while a soft landing would be better for stocks than a weak recession, which would still be okay for stocks relative to what people currently expect, which is a worse recession. If we actually had continued growth at some 3% GDP level kind of basis, stocks would do better, but they wouldn't do as much better as you might think because that would be met with more of that pessimism of disbelief.

Which would just, it's just like a dam slowly breaking before you get to the point where the pessimism of disbelief goes away. So with that, I just want you to see, sure, soft landing would be better than recession, but the reality is you don't really even need a soft landing for stocks to go up from here. You just need a recession to be better than that which people expect. Thank you for listening to me. I hope this was useful for you.

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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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