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 marketโ€™s arrival.

Transcript

0:02
So lately—
0:08
in fact—
0:09
as 2020 evolves through its back half and
0:14
increasingly, so after the elections and moving into the new year,
0:19
you hear all kinds of people talking about "is the stock market
0:23
euphoric? And that particularly got spiked with some dramatic,
0:28
initial public offerings,
0:29
AKA IPO's in December that did well.
0:33
And people ask our IPO's assigned the market being euphoric.
0:38
Is that a signal of markets being euphoric? Yes, it IPO's are,
0:43
uh, IPO.
0:44
And I wrote a book in 1987 called the wall street walls in which I
0:49
had a little section on IPO's and, and made the phrase.
0:53
Then that IPO means it's probably overpriced, which is true.
0:57
IPO's are priced for the issuer.
0:59
They're not priced for the buyer and when they are
1:03
common and when they go up in price afterwards,
1:08
that's a pretty good sign that there's some Bubblicious quality there somewhere.
1:13
And in that, they are,
1:17
indication as you have lots of them.
1:20
And particularly when you get to lower quality ones,
1:24
new ones of firms that don't really have a substantial business, don't have,
1:29
uh, kind of like with residential real estate,
1:33
don't have comparables that you can compare them to readily to establish value.
1:38
Uh, it's a sign of euphoria,
1:41
but it's not singularly conclusive and complete.
1:44
And that it's only one sign of euphoria.
1:46
And there's lots of other things to look for. People tend to think, and,
1:49
you know, I've espoused for years and years and years,
1:52
the line of legendary investor, uh, sir, John Templeton,
1:56
who was a marvelous man, by happenstance, I happened to have his,
2:01
birthday,
2:01
although obviously from a later year and I always paid attention to John
2:06
Templeton and his line that bull markets are born on pessimism,
2:09
grow on skepticism, mature on optimism and die on euphoria,
2:14
is pretty much always true unless something really big and bad that can wall up
2:18
the market comes along. That isn't pre priced and that happens. But it's rare.
2:23
The point about the euphoria is when you get into a market that starts to show
2:28
signs of euphoria.
2:29
You're really not in euphoria because you're not in euphoria until you get lots
2:33
of signs of euphoria. And in that lots of signs,
2:37
if you Foria people then are prone to want to get
2:42
out, they want to think of it as a trigger mechanism to bail. But in reality,
2:47
once sentiment starts warming at a pretty good clip.
2:50
It goes that way for a good long time. And before it gets to you for you.
2:55
And then once it gets to you for you,
2:56
it tends to say in euphoria for a pretty good time before you get to the top of
3:01
the market and it rolls over.
3:02
And when you get to the top of the market and it rolls over,
3:05
it is most typically, almost always, this is a rule you can take to the bank.
3:10
It is gentle in the beginning descent that it starts because the
3:15
market doesn't really want to scare you out right away,
3:18
because it wants to sucker you down and take you down. And so it's,
3:21
the decline starts off gently,
3:23
little bit of a drop of basic rule of thumb is that two thirds of the drop of a
3:28
bear market occurs in the last one-third of its time.
3:31
And only one third of the percentage drop occurs in the first two thirds of its
3:36
time. But the beginning is pretty gentle.
3:38
And therefore from the time that euphoria starts to build
3:43
becomes full fledged and actually exists,
3:48
you have a fairly long period of time before you get to the peak of the market.
3:51
And so while yes, IPO's are a sign of euphoria. They're not complete,
3:56
they're not conclusive.
3:57
You need to see a lot of other things we're not there yet.
4:01
In my chapter eight of my only three questions book,
4:05
I went to a whole long thing of all the stuff you need to see that, uh,
4:10
we're not there yet, but as I speak now today, uh, on January 7th,
4:15
uh, 2021, but the fact of the matter is,
4:20
we might get there by the end of the year,
4:23
a bull market might continue on longer,
4:27
or this is a bull market and you should enjoy it once that sentiment starts
4:31
improving at the rate that it has, it keeps improving for a good long time.

 

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