Fisher Investments Reviews The State of Investor Sentiment and What It Could Mean for Markets

Transcript

Ken Fisher:

You take a period like just this last month or so. As you see GDP-type and economic-type reports come in that also previously had a wide variety of forecasters and measurable consensus forecasts about those economic phenomena. And you see the economic phenomena coming in nicely better than the forecast. That tells you we're too pessimistic. It tells you we're too skeptical.

Paige Tyson:

Thinking of investor sentiment, you know, is it still a sour as it was a year ago as the new bull market was beginning? What investor fears today are warranted and which ones aren't?

Bill Glaser:

Well, I think sentiment certainly improved, right? I mean, coming off a year where global stocks are up 20 plus percent, it's not as pessimistic as it once was, 13 but it's also not as euphoric as it could possibly be.

So you know, from a sentiment perspective, we're probably bouncing around between skepticism and optimism without getting into too cute of precision between those but as I think about potential risks moving forward, I think a real risk, not one that's prevalent here and now but could be on the horizon, is when you get to that state of euphoria. Right?

Because when you get to that state of euphoria, people will find all sorts of reasons to discount it, to discredit it and really to project their optimism far, far, far out into the future. And I think that's the point in time where we've got to have our antennas up and be be cognizant of that. But we're not there yet.

And even being in a state of euphoria that could persist for some time. But I bring this up because, you know, in the past we've drawn many parallels to the markets of the mid-to-late 60s. And, you know, if you think about the bear market of 1966 having very similar parallels to the bear market of '22, I mean, there's economic parallels, sentiment parallels, political parallels.

That was a recession-less bear market. '22 was a recession-less bear market. You didn't have major capitulation back then. You don't didn't really have major capitulation in '22. And I bring this up because as you fast forward into '67 and '68, you know, that wasn't a real long bull market in terms of duration. And I think we need to be mindful of that. Could this be a long bear bull market?

Absolutely. And we'll take it each year at a time. But we need to be cognizant of the possibility of us reaching that euphoric level of sentiment when everybody else is discrediting it. And to me, I think that's one of the bigger risks that's on the horizon. But as you think about all these other things, fears that investors have that you read about or hear about in the media— and it could be China, it could be interest rates, it could be US debt, I mean, you name it. Those are all the fears that if you think what really creates a bear market, it's a big surprise, it's got magnitude, and a lot of those fears, you know, really lack that that surprise feature that surprise factor.

Paige Tyson:

Yeah.

Jeff Silk:

You know, I want to add on to what Bill was saying, and we've shown our clients this for over 20 years now, and that's the analysis that we do by collecting professional market forecasts for the stock market for the year. And then we put together a sentiment bell curve. And to me, the amazing thing about this year's sentiment bell curve is the medium is something like 2%, meaning market forecasters —whether it's forecasters for banks or big brokerage firms or whatever— they're not really expecting a very good year in the stock market. And you don't have a lot of people that are expecting a huge year. And you don't have a lot of people that are expecting a terrible year.

The point is, is that the bell curve is pretty much in, I would say a much-below-the-average-market-return phenomenon. And so it wouldn't surprise us if it surprised a lot of the forecasters that the market was much stronger than they expected.

Ken Fisher:

So let me just take a second on that. In the 90s, we started creating these bell curves. And the concept behind them was that professional forecasters, as a group, are wronger, stronger and longer than other investors. That they, with great access to information, reflect exactly that which is already pre-priced. That which the stock market does for a living, which is pricing all widely known information.

Therefore their consensus is always wrong. We've documented that over a really long time period. That doesn't tell you what will happen. It tells you what won't happen. And so this won't be a year that's somewhere around 2%. Could it be much worse?

Yes. Could it be much better? Yes. But that only gives you one glimpse into sentiment.

Sentiment over all is many-faceted, and some of them are hard to get a handle on. As Bill kind of pointed out, parsing in the John Templeton phraseology of bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

Figuring out exactly where you are in that Templeton framework is not precise at all. But there are some things that are fairly easy to see. Or, as Yogi Berra said: "Sometimes you can see a lot just by looking." And the fact of the matter is, you take a period like just this last month or so, as you see GDP-type and economic-type reports come in that also previously had a wide variety of forecasters and measurable consensus forecasts about those economic phenomena. And you see the economic phenomena coming in nicely better than the forecast.

That tells you we're too pessimistic. It tells you we're too skeptical. It tells you sentiment's not high. It's not down in the dumps when you take a period like they expect positive GDP, but not nearly as positive as it comes out. That tells you they're too negative. That tells you they're not really optimistic and they're not really euphoric. They're that thing Bill was talking about— of straddling someplace between the high- end of not too much skepticism and the low end of not too much optimism.

Paige Tyson:

Which is bullish for markets because it gives markets the ability to then surprise to the upside.

Ken Fisher:

Surprise is always what moves markets the most.

Paige Tyson:

Exactly.

Aaron Anderson:

And I would say, you know, qualitatively one of the features I think that tells you you're not too far up that sentiment curve is what Ken's always called all the "yeah buts" in the market these days.

I mean, for every positive feature you see out there, there's a yeah but why people disbelieve it. We talked about the Magnificent Seven. It's: "Yeah 2023 was a good year for the market. Yeah but it was only the Magnificent Seven driving things." Not true. But that's the perception. "The economy is doing well. But, you know, monetary policy has these long and variable lags, and eventually that's going to shove you into recession."

Jerome Powell didn't turn into Paul Volcker. But still they're not willing to cut interest rates very aggressively. Which one of the bigger misperceptions economically is that we need some type of rate cuts for the economy to do well or the markets to do well, and so forth. And so I think there are lots of ways to measure where you are on that curve.

As Bill mentioned, it really doesn't matter. It's the extremes that matter most. Are you in pessimism? You can look back in 2022 and say there was some pretty extreme pessimism out there. Are we in extreme optimism?

Absolutely not. Or euphoria? We don't think we're anywhere close to there. Where you are in between doesn't really matter that much. But I think one of many signs that you're not at that upward end of the Templeton curve is just the fact that everybody tends to disbelieve these positive features today, which probably tells you is exactly as you mentioned— that there's still a lot of upside surprise potential out there.

Ken Fisher:

So Aaron correctly says—one of the many things that he said correctly—is Now I just want you to think about 2023, which documented perfectly that you don't need rate cuts.

2022 actually documented that you don't need rate cuts because, depending on where you are in the world, the market started bottoming in June of '22, and by the time you got to October of 2022, the world market had bottomed completely. And we kept having rate rises that whole time—the whole time. And in 2023, we didn't get rate cuts and the market's still going up. You don't need rate cuts. The back half of 2022 and 2023 showed that. But there's a bigger lesson from that.

Going back to the point of markets pricing all widely known information, as soon as you can get a very-wide view that you can read in every darn place in the world, in the podunk times, that you got to have rate cuts. You know that's priced already. You follow that?

It's so simple. People have a hard time with it. People have a hard time getting that. Whatever your friends at the cocktail party are talking about might be right, might be wrong, but won't impact stocks.

Voice of Ken Fisher:

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