Personal Wealth Management / Market Analysis

Ken Fisher on the Bounce Effect

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher describes the “bounce effect” and what it could mean for stocks in this new bull market. According to Ken, the bounce effect occurs as stock category leadership rotates around bear market lows—where stocks that fell the most in a bear market tend to appreciate, or “bounce”, the quickest in the nascent stages of the next bull, typically 8 to 15 months from the market trough.

For example, Information Technology stocks were disproportionately hurt during 2022’s bear market, while value stocks, particularly driven by energy, did best. Thus far, during the bull market period since mid-October 2022, the opposite has been true. Additionally, Ken believes certain market fundamentals specific to this recovery may continue to support tech and growth stock leadership beyond the average bounce period duration.

Transcript

Ken Fisher: Sometimes I've talked about the bounce effect and maybe you haven't heard me on that before, so maybe you don't know what that is. So I'm just going to take a second to describe what it is. The bounce effect is one that I've relied on regularly over decades where categories, not necessarily every single stock that fall the most in bear markets tend to bounce the most early in the next bull market, and that's the bounce. So more or less what commonly happens is in a bear market, people freak out. You know, that eek, eek, eek. And some categories get hurt more than others for whatever reasons. And the more that builds, the more people eek, eek, eek and freak out about those categories, which then once you hit the bottom, bounce more in the bounce called the bounce effect that typically lasts eight to about 15 months, about 11 months on average. We're about eight months now into this bull market. So there ought to be a few more months ahead.

I could put some qualifiers on it that might apply this time. Might not. That's about opinion, not about fact. Typically, you get a longer bounce when you've had a longer, bigger decline. The decline last time, the 2020 bear market ending in the end of September, beginning of October wasn't as big a bear market. It was a what I call a cub bear market. It qualified as a bear market, but just by a little bit. And it wasn't very long for a bear market starting at the beginning of January and ending at the end of September about nine months long.

So therefore, maybe we don't have quite as long a bounce. Maybe we're on the short end of how long the bounce effect can last. What happens after that? Well, after that, other fundamentals take over and push the stocks you may remember, And consistent with the bounce effect that in 2022, tech stocks got clobbered and were among the worst performing categories. Value stocks, particularly driven by energy, did best. In the bounce. It's been the reverse. Energy stocks are flagged. Tech stocks of Led growth has led, including places like France and Italy, with non tech growth. And value stocks reflect. After this, we have to come to some fundamental features.

Will the Fed get to where they stop raising rates? Will we see short rates being cut? Will we see the yield curve be less steep, maybe on steepening to the point? Yield curve being short term rates being above long term rates, will that. Yield curve inversion go away? Usually those things continue to favor growth and tech. Will they this time? I think so. How long? I don't know. But I would expect the categories that have done the best in this particular bounce to continue to lead, at least for a good period of time after the bounce effect is over. Thank you for listening to me. Subscribe to the Fisher Investment YouTube Channel If you like what you've seen, click the bell to be notified as soon as we publish new videos.

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