Ken Fisher Mailbag: Fisher Investments Reviews the Market Sentiment Life Cycle, Double-Digit Return Years and More

Transcript

Ken Fisher, teaser:

But the tech bubble happened partly because there were enough scary things en route —once we'd gotten past pessimism, skepticism, and optimism—to slow down the period of euphoria.

Ken Fisher:

Every month, people send in questions. I write 'em up on a little card so my septuagenarian eyes can actually read what they say. It says: "You always say, 'bull markets are born on pessimism, grow on skepticism, mature on optimism and dying euphoria.' But how long does each stage of a bull market typically last?" Ooh, that's a great question. And ooh, I don't really have a great answer for you. Let me put it into two problems.

One, intuitively, you know that some bull markets are longer than other bull markets. So therefore the longer the bull market, it makes perfect logical sense that the longer each of the four stages would be. You follow? That part's easy to understand. So, for example, you've got bull markets that have existed in the past that have been less than two years long. And ones like in the 90s had seven years in a row of rising prices. If you think about seven years in a row of rising prices or longer, those stages of the four phases get longer.

But the other part is that there's no rule that says within a bull market what percentage of the time each stage has to be. I'll give you some heuristics, but they're not precise. The deeper and longer and worse the bear market is, the more it scares people. Intuitively you understand that. The more those people are scared— the more people and the more they're scared from a bigger, longer, worser, uglier bear market (with a lot of scary stories that go with it), the longer it takes to get them past the pessimism phase.

But after they get them past the pessimism phase and the skepticism phase and the optimism phase, it's not at all impossible, but not at all certain, for the euphoria phase to come on pretty fast— kind of falling into the motif of: "I've walked the valley of the shadow of death, now I fear no evil." And the fact is, sometimes you get these long periods of pessimism turn to skepticism, skepticism turn to optimism and then euphoria comes quickly. Sometimes euphoria comes slowly. Why might that happen? Why might euphoria come slowly? Well, because euphoria might come slowly as scary things appear on the horizon that cause people to say, "But wait a second, that's new and different and scary and maybe I should be afraid of that." Even though nothing actually of importance has happened. Let me give you an example of that.

Many of you are old enough to remember when, going into the year 2000, there was a great fear that the conversion of the computer systems would cause— that they'd been all set up before with a time clock that didn't allow for convergence away from the 20th century into the 21st century. And you'd get the Y2K phenomenon and the whole power grid might go out. And there were all kinds of New Year's Eve Y2K parties where people were: "Will the power go out at midnight or won't it?" And the fact of the matter is, of course, nothing happened. But there were a lot of people that were concerned about that.  And you can see why. Now, mind you, that was a fairly long extended period of euphoria. That was also, if you will, and remember the period where we had the tech bubble. But the tech bubble happened partly because there were enough scary things en route —once we'd gotten past pessimism and skepticism and optimism— to slow down the period of euphoria.  Another one in that process that you may remember was in 1998, the so-called "Russian Ruble Crisis". And in the same year, the so-called "Long-Term Capital Management Crisis". And those two—neither of which truly amounted to a hill of beans when you got right down to it in economics— both seem new enough and different enough. Scaring people, dampening down, tamping down euphoria. So the answer to your question is there's not a good answer.

"You have previously spoken of looking at the earnings yield of the S&P 500. Is it of any significance to you that the current earnings yield of about 3.4% is below the yield on the ten-year note and has been below that since January 2024?" No, there isn't. Let me say, this is a way—the earnings yield is a way—to kind of think about how does the Fed think about the stock market? How does the central bank think about the stock market? Or another way to think about that is if you really want to try to think through what the Fed might do, which I've always considered kind of a pointless activity. This is one input. But I've also written at length over and over again that valuations any way you do them, —and I don't care how you do them, it doesn't matter— are not predictive of stock returns on a one-, three- and five-year basis.

So once you get that in your bones—that valuations are not predictive of future stock returns on a one-, three- or five-year basis— and I don't really believe that most people, if they had a 10- or 20-year view of the stock market that might be correct, can stomach the notion of being wrong for three, four or five years before they get to being correct. I mean, I'll come back to talk about that in a second, but I don't really believe that you can use any valuation technique. And I've written a lot about this before that valuation techniques, regardless of what they are, don't help you get there. Why? They don't help you forecast one-, three- and five-year returns because valuations are exceptionally widely well-known and markets pre-price all widely-known information. It is true that there is this famous Shiller CAPE PE that says that if it's an above-average CAPE PE  ten-year future returns should be below average —not negative, below average.

The fact of the matter is, that's all what you can view as back-tested data based on history. But from the time that the CAPE Shiller PE has been operating, it actually hasn't been very good with ten-year returns, and it's been abysmal, as per work that Mayor Statman and I did a long time ago, at predicting one-, three- and five-year returns. It has zero predictability on one-, three- and five-year returns, you know, still today. And I don't understand why a lot of people cite the CAPE the Shiller CAPE PE cyclically adjusted price earnings ratio. It doesn't help you for anything that any human really cares about when it comes to investing. And this falls into that category.

"Can you please tell us the difference between short- and long-term interest rates? Yeah. So the real difference between short and long term interest rates is that the central bank, through its market operations, controls what happen to short-term rates. But what do we mean by short-term? 90-days and under. They can control short-term rates. Long-term rates they can't control. They're free-market set. So when you think of a 90-day Treasury bill,  the Fed can manipulate that. When you think of a 10-year Treasury note, they can't. Let me extend that just briefly a little bit, a little different way. I mean, there's a lot of things people presume that just ain't so. And that doesn't mean the reverse is so either. But again, when everybody thinks something will happen in markets, it won't. Not necessarily the reversal happened, but something else happened.

So an awful lot of people thought and said and bet, and it was generally conventional wisdom, that when the central bank started cutting rates in September that long-term interest rates should fall because they see it as all one thing. But in fact, they started cutting, that was seen as indicating you'd have a stronger economy, if you have a stronger economy People believe that stronger economies lead to more inflation and more inflation should lead to higher long-term interest rates. They'd freak out. And we've had rising long-term interest rates not falling. Does that happen every time? No. It's all about what they believe. You follow? And it's also somewhat transient. But what I'm wanting you to see is the Fed can't control long rates. Long rates don't necessarily parallel short rates. Short rates are controlled by the Fed or in other countries their central banks. And so the big difference is category or not, government debt or non-government debt, short rates move based on what the central bank does. Long rates move based on what the free market does.

"How common is it to see three double-digit growth years in a row for the S&P 500?" This a tricky question. It's a good question, but it's a tricky one. Let me take you through the tricky part.  It's all a question of when did the  bull market that you're in that's having double-digit years begin? So, for example, the average bull market in history has been about three and a half years, a little longer. So, if  the bull market began in the back part of the year, it's pretty normal  to have three double-digit years in a row, because the average return in a bull market is 23%. So once you get that, the average return in a bull market is 23%, and the average bull market is a little over three-and-a-half years in length, then you get that. But not all bull markets begin in —well, they all begin in 1 of 12 months. I've measured that.

Every one of them begins in 1 of 12 months. But you got about a 1 in 12 chance of any given one beginning in any one month. So if they're beginning in February, you might get a double-digit year. And yet you might not get to four. There's years that have been double-digit like four and five years in a row.  Why? Because it starts at a point in time. It's a longer bull market and it just keeps accumulating. But, what I'm wanting you to see is, the frequency at which you get three in a row doesn't tell you anything about the one you're in.

"In the past, you've told new investors to read the top most influential investment books.  So is there one or two you would recommend?" So this one is— this one is also one that requires a little bit of nuance, because it depends a little bit on who you are.  If you really are a new investor, you need to get a beginning book on how the stock market and bond markets work. And if you just go and Google online, there's a whole series of them, like Tobias' The Only Investment Book You'll Ever Need. But once you get past reading a couple of beginner's books that just teach you how the stock market works, how the bond market works, things like that, then the most legendary book to read is Ben Graham's The Intelligent Investor. And pretty much nobody should be an investor. Everything that's in that book isn't gospel, and I wouldn't particularly necessarily believe. But there's a lot of great stuff in it. And then the other one that I would refer you to is my father's hallmark book Common Stocks and Uncommon Profits by Philip Fisher, which tells you about the core concepts behind growth stock investing from the 1950s.

Again, it's hard to come up with new investment books with new ideas. It's just there's not that many new ideas that are worthy. I mean, I've written a bunch of investment books. I don't have any great new ideas that justify 250 pages worth your reading. But the fact of the matter is, that puts you as some of these older books are actually the ones that are the best. Thank you for listening to me. I hope you found this useful. Send in more questions for next month, and I'll try to answer them for you if I can.