Personal Wealth Management / Expert Commentary
Ken Fisher, Gives an Update on the Bounce Effect in 2023
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses a concept he calls the “bounce effect”—the tendency for stocks that fall the most in a bear market to rise the most in the early stages of the next bull market. Ken says this dynamic is common following bear markets and has played out near-perfectly since stocks bottomed in October of 2022 with growth categories such as Technology—a laggard in the 2022 bear market—leading the rally.
Ken discusses how the bounce effect typically lasts a year into a new bull market, but can vary by market cycle. While Ken believes the bounce effect has some room to run, he believes more economically sensitive categories come may come into favor once investors gain confidence in future economic growth.
So, I've written about this quite a bit in the various places that I write, in English and in other languages. And the simple fact is, and this has worked not perfectly, but almost perfectly in 2023 and the last part of 2022, categories of stocks— not every individual one—that fall the most in a bear market, bounce the most early in the next bull market. This, if you'll pardon the pun, is almost categorically true.
The fact of the matter is that that worked pretty perfectly as you look at what dropped in 2022, in the period from October, the beginning of October in 2022, when the Midterm Miracle started—the nine months that begin October 1st before a US midterm election and the subsequent June 30th— the most consistently profitable nine months in all of measured stock market history. Throughout that period and since the categories that have done best, not every week and every month, but overall and in fact every quarter, have been the ones that declined the most in the bear market. So this is overly and simply growth doing well, value lagging. Bigger doing better than smaller. Things that are higher quality, doing better than things that are lower quality within both of the categories that I just mentioned. These are the categories like, let's say big Tech, that got battered the most in 2022 and from the bottom in October, early October, bounced the most ever since.
This, which I call the bounce effect, has been working really, really well. It'll continue to work well for a while. Exactly how long? I don't know. But it normally works for about the first year of a bull market. Sometimes a little longer, sometimes not. And is usually supplanted when the world has enough confidence in future economic growth. Whereas before it hadn't as the bear market climaxed. That people get to the view that companies that don't have inherent growth attributes and are inherently lower quality will be able to grow with the economy.
Now in different bear markets that act differently, different categories of stocks lead the market down. And those categories typically lead the market back up. This time it's those that I cited. So that, for example, the defensive stocks, the Consumer Staples, Energy, Utilities, value and smaller stocks overall didn't lag in 2022, but they also didn't rise as much in 2023. So, I'm saying to you, this effect goes on a little longer. It'll transition and the thing to look for, to see when it might transition, is when the world starts to have more oomph or emphasis on, "Boy, the economy is growing nicely now." We can now get growth out of these other ones, unlike what we believed before, when we thought the world was having so many economic growth problems and economic growth fears domestically and overseas. And with that, that describes to you pretty much perfectly how the market has operated this year and the beginning of last year and will for a while. That thing which I call the bounce effect.
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