Personal Wealth Management / Expert Commentary

Ken Fisher Explains What Increased IPO Activity Means for Markets

Euphoric, or relentlessly positive, stock markets are one sign that a bear market is potentially around the corner. But is an increase in the number of companies filing for initial public offerings (IPO) a clear indicator that markets have reached euphoria? In this video, Ken Fisher, investor and founder of Fisher Investments, looks at rising IPO activity as a late-market-cycle symptom and implications for a potential bear market’s arrival.

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A title screen reads: “Ken Fisher Explains What Increased IPO Activity Means for Markets”

The title screen wipes to a man in a blue suit, identified as Ken Fisher, who appears on screen and begins speaking.

Ken Fisher: So lately, in fact, as 2020 evolved through its back half and increasingly so after the elections and moving into the new year, you hear all kinds of people talking about "is the stock market euphoric?” And that particularly got spiked with some dramatic, initial public offerings, A.K.A. IPOs in December that did well. And people ask are IPOs a sign the market is being euphoric. Is that a signal of markets being euphoric? Yes, it--IPOs are. I wrote a book in 1987 called The Wall Street Waltz in which I had a little section on IPOs and made the phrase then that IPO means It's Probably Overpriced, which is true.

Ken Fisher: IPOs are priced for the issuer. They're not priced for the buyer and when they are common and when they go up in price afterwards, that's a pretty good sign that there's some Bubblicious quality there somewhere. And in that, they are an indication as you have lots of them. And particularly when you get to lower quality ones, new ones of firms that don't really have a substantial business, don’t have—kind of like with residential real estate--don't have comparables that you can compare them to readily to establish value.

Ken Fisher: It's a sign of euphoria, but it's not singularly conclusive and complete in that it's only one sign of euphoria. And there's lots of other things to look for. People tend to think--and I've espoused for years and years and years--the line of legendary investor Sir John Templeton, who was a marvelous man--by happenstance, I happen to have his birthday, although obviously from a later year--and I always paid attention to John Templeton and his line that bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. It’s pretty much always true unless something really big and bad that can wallop the market comes along that isn't pre-priced and that happens. But it's rare. The point about the euphoria is when you get into a market that starts to show signs of euphoria, you're really not in euphoria because you're not in euphoria until you get lots of signs of euphoria.

Ken Fisher: And in that lots of signs off euphoria, people then are prone to want to get out, they want to think of it as a trigger mechanism to bail. But in reality, once sentiment starts warming at a pretty good clip, it goes that way for a good long time. And before it gets to euphoria. And then once it gets to euphoria, it tends to say in euphoria for a pretty good long time before you get to the top of the market and it rolls over. And when you get to the top of the market and it rolls over, it is most typically, almost always--this is a rule you can take to the bank--It is gentle in the beginning descent that it starts because the market doesn't really want to scare you out right away, because it wants to sucker you down and take you down.

Ken Fisher: And so it's, the decline starts off gently, little bit of a drop. A basic rule of thumb is that two thirds of the drop of a bear market occurs in the last one-third of its time. And only one third of the percentage drop occurs in the first two thirds of its time. But the beginning is pretty gentle. And therefore from the time that euphoria starts to build, becomes full-fledged, and actually exists, you have a fairly long period of time before you get to the peak of the market. And so while yes, IPOs are a sign of euphoria.

Ken Fisher: They're not complete, they're not conclusive. You need to see a lot of other things--we're not there yet. In my chapter eight of my Only Three Questions book, I went to a whole long thing of all the stuff you need to see that. We're not there yet, but as I speak now today, on January 7th, 2021. But the fact of the matter is, we might get there by the end of the year, a bull market might continue on longer. This is a bull market and you should enjoy it once that sentiment starts improving at the rate that it has, it keeps improving for a good long time.

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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