Fisher Investments Reviews Investor Sentiment Amidst Recent Volatility

Transcript

Ken Fisher:

So, I've written a lot and talk a lot about sentiment impacting stock market returns moving forward. And there's so many things that I've said that I want to try to encapsulate some of that briefly. The line that I've used for decades and decades I stole, but always a tribute to Sir John Templeton, which is that: "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

Now, the fact of the matter is, that's pretty much true. The difficulty is figuring out where you are in that. And in the flip side, bear markets go almost perfectly in reverse, down to dire pessimism at the bottom— in which case you get the birth of the next cycle upward. The fact is that it's difficult for people to discern pessimism, skepticism, optimism, euphoria and where you are in those phases.

Easier to accept the phases than the granularity and the transition between one to another. There's not a precise way to measure that. There's lots of different tentacles that you get into trying to figure out sentiment, but none of them are precise and it's more of an art than a science.

The fact is that there's complicated ways to do this, as I've written about, and simple ways to do this, as I've written about. The simplest way that everybody watching this video can do is: At a moment in time, go online to lots of different financial sites, and look at what expectations are for commonly announced economic phenomena, like future announcements for inflation data, like future expectation—consensus views—for subsequent quarter GDP announcements, for earnings per share for the S&P 500—you can just go down the list.

Just take economic things and look for consensus forecasts for them, and then wait to see whether the actual numbers come in higher, better or lower, worse—unless it was inflation, and then lower would be better and higher would be worse, for example. But do they come in better than expected or worse than expected? If most of them are coming in better than expected, it's telling you people are too pessimistic. If most of them are coming in worse than expected, it's telling you people have been too optimistic. That's not very hard to understand what I just said.

The fact is that then there's bigger picture, longer-term ones that you look at like —and I've written about this for over 35 years— when there's lots of initial public offerings. That's a sign people are pretty darned rosy in their expectations. When there's a paucity of initial public offerings, then that's a sign people are not very optimistic at all in their expectations because IPOs come when the market's pretty rosy and ebullient, meaning you're off into the latter stages of optimism moving into euphoria. Not that there can't be some IPOs.

When you see a lot of IPOs, and particularly when you see IPOs, (IPOs, remember, that stands for "initial public offering", which a third of a century ago plus I categorized as IPO means "it's probably overpriced".) but the fact is that when you see particularly low-quality IPOs in volume, that's a pretty good sign that we're rocking and rolling in the marketplace.

Now, what I would say about where we are now, which is what people are always asking about—where are we now? What's going on now? How's our sentiment? Now, there's a couple of things you can say. One of them is economic events have been coming in on balance better than people thought they would. You could see that in August when people in July and August had had the market going down for fears over the war, for fears the consumer was tapped out, for fears that were past a good part of the hiring cycle in GDP and the economic recovery.

Fears about so much of the wars, fears about all of the wacky turmoil and elections. I'm not going to talk about that in this video for sure. I need you to be able to keep your stomach about you. But the fact of the matter is that all of these things people got excited about thinking, looking for the bad, looking for the bad, looking for the bad. Then in July and August, thinking maybe the bull market is over as we had a fairly sharp downdraft off the top, and I'm gonna come back to talk about that in a moment.

All of that was overcome by economic numbers coming in consistently better than people expected, saying people had not been optimistic enough, that there had been too much skepticism, not overall skepticism— I believe we're in the early phases of optimism in our overall macro emotion. But going back to Sir John Templeton, "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

We haven't gotten close to euphoria. You don't have wild projections for the future. You don't have a lot of IPOs. You certainly don't have a lot of crazy IPOs of low-quality garbage companies floating into the marketplace. You don't see any of what I consider the signs of euphoria. What we've got is mild optimism, tempered by still some remnant skepticism. And that's a good thing.

Now, let me make a different point about the market action from July to August in the period leading up to the mid-July market peak in the S&P 500 and the non-US market overall. Globally, you had a sharp run up to a peak that was steep, followed by a decline that was near straight down. This is not the way bull markets end, and I have said this for a very long time. There's an age old phrase, —and it's been so long since we've had a traditional classic bear market, going back to 2007, '08, '09— that people kind of forget legendary phrases of the past, but the phrase that you should think in your mind about how bull markets end is that they die with a whimper, not with a bang.

It does not serve the great humiliator, the market, to give you such a sharp down drop right off the top that it scares everybody away. What it wants to do is roll over gently, suck in more money, suck in more money, suck in more money and then go down steeply later.

The normal course of a bear market is for the first two thirds of the time in the bear market, to only constitute about one third of the percentage drop the bear market will have, roughly, and the last one third of the time to constitute two thirds of the drop. And that pattern, not perfectly but pretty close to perfectly, is the way bear markets have progressed from long before I was ever born. The first two thirds roughly make up about one third of the drop. The last two thirds of the time, the last one third of the time makes up about two thirds of the percentage drop. Die with a whimper, not with a bang.

So what the sharp drop off the top does is resets our sentiment lower. It scares people. It takes their sentiment back to a lower level, back to where it had been well before you got that rise. Because people hate losses in America two and a half times as much as they love gains, and in Europe more like four plus times as much as they love gains.

So a little bit of drop makes them go, whoa, look at all this terrible stuff. And I'm scared. And I'm scared. And I'm scared. That drops sentiment down and builds the base for the next leg up in the bull market, which is where I think we'll go from here. Thank you very much for listening to me. I hope you found this educational and useful.

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