Personal Wealth Management / Market Analysis

Listener Mailbag

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher answers questions about small-cap stocks, rate hikes, where we may be in the market cycle and the state of global economy. To begin, Ken walks us through his expectations for small-cap stocks. He shares how the “bounce effect” has room to run, favoring the large, high-quality growth stocks—hit hardest in 2022’s bear market—which have led the market higher this year. In his view, its likely small-cap stocks continue lagging until investor sentiment becomes more optimistic.

Ken also addresses fears on further Fed rate hikes. He explains how stocks are higher now than when rate hikes began in March of 2022. He also thinks further hikes are unlikely to surprise investors, which should be bullish for stocks. Ken then discusses where he believes we are in the market cycle and the health of global economy. He explains how the market is a decent leading economic indicator and that, while he doesn’t expect “gangbusters” growth, the market’s continued rise suggests the global economy should do just fine.

Transcript

Ken Fisher:

Lots of fear about additional rate hikes. Welfare of a false factor is always bullish. The fact is the fear in the market now. The Fed rate hikes tells you you don't have to worry about it too much. You should worry about something other people aren't worrying about. People are always asking questions and I get questions sent in to me and I'm a little bit almost half blind, so I have to wear my glasses if I want to read stuff. And so we type them up on these little cards.

And once a month I read you some and give you real fast answers. So this one says, seems small stocks of the category have been lagging behind so far. Do you believe it's time to build up positions now to prepare for the hopefully uprising? Let me try to put that in perspective for you real fast. No, I don't think that's now. Do I think that comes? Yes. When do I think that comes?

I think when we get to the point where we're farther along in the bull market, in the John Templeton phrase, are born on pessimism, grow on skepticism, mature on optimism and die of euphoria, where we're moving from the skepticism into the optimism phase, which I don't think is yet, but I might be wrong.

That's the time you do that. The reality is that normally, and some people get confused with this, but normally, and this time what drops the most in the bear market, not by individual stock but by category bounces the most in the subsequent bull market. That's worked perfectly this time. And last time it wasn't small. That dropped the most, which happens typically when you have a bear market leading into a big bad recession. This time, small stocks held up compared to bigger stocks. Bigger stocks that dropped more.

They've been bouncing back more. That'll continue, in my opinion, based on the way I look at markets, which again, I always know I may be wrong, but it should continue until we get into a more optimistic part of the bull market phase and get past the skepticism part. And so therefore, I think it's a little early. Lots of fear about additional Fed rate hikes. Would more rate hikes through year end be automatically bad for stocks? The answer is rate hikes overall. Mean it's bad for stocks up to now anyway.

Think about that a different way. Markets higher than it was before they started their rate hikes. Now before they ever did their first 75 deep rate hike from the Fed before the overseas central bank started hiking rates. The fact is there's only I mean, the first 75 basis point rate hike, three quarters of 1% was in June of last year. The market bottomed in late September. It didn't have much wango tango effect. And they raised rates over and over and over again since then, and the market's been doing just great through all that. So if it's been doing just great through that, why should worry?

Let me help you think about this a different way. Lots of fear about additional rate hikes. Welfare of a false factor is always bullish. The fact is the fear in the market now. The Fed rate hikes tells you you don't have to worry about it too much. You should worry about something other people aren't worrying about. Are we in an early cycle or late cycle market? Is it potatoes or potatoes? I don't know. Let me try to put that in some perspective for you. It's the only perspective I can get. Normally. Categories of stocks that fall the most in a bear market bounce the most in subsequent bull market. That's worked perfectly.

So therefore that's acted since we officially had a bear market. Not a big one, not a long one, but by all the standards that bear markets are typically measured by, we had a bear market. I said at the time that it acted, in my opinion, more like a correction, a big correction, a bigger correction than we normally ever get. Within a bull market, then it acted like a conventional bear market. But the fact is it was officially a bear market. And in that bear market, the category that fell the most. About the most in the subsequent bull market. But oh, by the way, let me just be real clear.

The categories that fell the most aren't the ones that normally fall the most in a bear market, which is why it acted more like a correction in many ways than it acted like a normal bear market. You can say that the market's also acting like it normally acts after we've had a correction in a light cycle long bull market, as if the bear market that happened wasn't really an interspersing bear market, but instead just a little comma and pause in the ongoing bull market. Which is it? I don't think I'm going to really know the answer.

Is that early cycle or late cycle until we get to a point which we will get to eventually. But I don't think we're getting to any too soon where the categories that are leading the market now, namely really big, high quality growth in all of its flavors, stop leading the market and other categories start to. That's where the punctuation mark in this cycle comes in, in my opinion, that will tell us the answer to it, that we've been in late cycle or early cycle.

But in the meantime you don't really have to worry about it because it's those categories biggest, highest quality growth that's leading the market. What's the state of the global economy right now and how does GDP relate to stocks? Well. First, the stock market is a leading indicator. It's one of the better leading indicators.

None of them are perfect, but the stock market tends to move before the economy does. GDP tends to be measured as a number afterwards. It's always a backward looking data series. Therefore. GDP likes the stock market. GDP is a number that comes about the economy after the economy's happened, but the stock market moved before the economy happened. Now, How's the global economy doing right now? Well, I think, you know, it's doing better than people thought because stock market's been doing better than people thought for over nine months now. And we're in a bull market.

And if we're in a bull market and the stock market's rising, that's telling you where the economy is going. Even though people don't want to believe that the economy overall is low growth. Some places doing better than others, which is always true. Inflation is coming down, led by America, but coming down around the world.

Which was a big fear for so many people for so long and continues to be. Overall, the economy's not so bad when people expected it to be terrible. It's a slow growth. Spotty economy. But it's a growing economy globally. So as you look forward shy of some new big bad things happening that people aren't currently looking at and as while the market's rising. You should be expecting.

The economy to continue doing relatively well. Not gangbusters, but not disaster. Good enough, but not perfect. Pretty well and better than your friends talk about. Certainly. Better than politicians want you to believe because they want you to believe they're going to fix it and you're going to vote for them. And don't worry about voting for him anyway. Thank you very much 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.

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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