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[Naj Srinivas] Hello, and thank you for tuning in to this Fisher Investments market-insight podcast, where we discuss our firm's latest thinking on global capital markets and current events. My name is Naj Srinivas. I'm the Group Vice President of Client Communications here, and I'm joined today by Ken Fisher, Executive Chairman and Co-Chief Investment Officer of Fisher Investments.
[Ken Fisher] How are we doing, Naj? [Srinivas] I'm great, Ken, and thank you very much for joining us today. [Fisher] My pleasure. [Srinivas] So, Ken, as you know, this bull market began a little over 10 years ago now. It began March 9, 2009, and just this past weekend-- recording this on March 14th today-- but just this past weekend, we actually surpassed that 10-year mark, so I wanted to spend a little bit of time today talking about this very long bull market, what your thoughts are on it, and where you see it going from here.
So let's just start out with your thoughts on the length of this bull market, which is pretty unprecedented in history. [Fisher] Well, I'm not sure if I'd go that far. The reality is it's a very long bull market, and length of bull markets really don't have anything to do with anything any more than different colors have to do with raccoons.
It's just-- it is what it is. The... Making a long story short, the reason this bull market's been as long as it has, overall, is that there have been a lot of depressant features that have kept us from ever getting to the euphoric phase, where people throw caution to the wind and do crazy stuff. The average annual return has been lower, so the length has been longer.
As I have said over and over through the course of this bull market, the best way to think of bull markets is John Templeton's four-phase model that articulated that bull markets are born on pessimism, grow on skepticism, mature on optimism, and die of euphoria, and we have a hard time in this bull market ever even sustaining optimism for very long, so we got to optimism very nicely in 2017, with great stock-market returns, and people thinking we had a bright future, and then we dashed that as a society in 2018, and moved back into a world that became more skeptical than optimistic, and we've never gotten close to euphoric, as evidenced by the fact that we've never really had a vibrant IPO market in this bull market.
If you keep sentiment dour and returns on average not that high, you get a longer bull market. Not a lot more complicated than that. [Srinivas] What are some of those depressant features that we've experienced in this bull market? [Fisher] Well, the first one, of course, was the relative size of the bear market that preceded it, which caused people to lower their expectations and expect an ugly world.
The second one is the complete misbelief that quantitative easing was somehow stimulative and inflationary. As we've written here, for the entire length of this bull market, quantitative easing is-- which has been deployed in other places before-- is fundamentally misunderstood. It's never, ever stimulative.
It's never, ever inflationary. It doesn't increase the quantity of money, which is what you need to do to get inflation. It's always contractionary, a deflationer, and it has been every place it's been deployed, has been this time, so, in the first couple of years, it was deployed. While people were thinking that we were gonna get a stimulative inflationary force to keep us alive in a tough time, we actually had the quantity of money shrink, a point that still, to this day, most people don't understand because they never looked for it, and then after that, throughout the course of this entire expansion, from 2009 on, the quantity of money has grown at the slowest annual rate of any economic expansion or bull market in measurable history.
From that, you have this world where people said the only reason we're having an expansion is because we're flooding the system with money, when, in fact, we had a low-interest rate, tight-money policy, that was contractionary and deflationary, and we were having an expansion despite quantitative easing, not because of it, but that kept people on the dour side, and then you had the little piggies' problems in the...
five, six years ago, and, you know, Portugal, Italy, Ireland, Greece, and Spain, and their concerns, and the double-dip problems that occurred in Europe because of that. You can-- And then, of course, there was the fear of Trump, and all things said, "Trump, Trump, Trump, Trump, Trump, Trump, Trump, Trump!" that ran on in 2016.
You've had a lot of these, but, meanwhile, the bull market's been-- and the economic expansion, on a global basis, little weaker here, little stronger there, has been a little bit like the Little Engine That Could, just chugga, chugga, puff, puff, chugga, chugga, puff, puff, beep, beep, and that's kinda been the way it's been.
[Srinivas] Ken, what surprised you the most about this bull market? [Fisher] Oh, I think the part that's surprising the most is the degree to which things that are right in people's faces, they can't see. They can't see the... what I used to call the "pessimism disbelief," where they just shook off every good thing that happened, looking for bad things.
They couldn't see, and still can't see that quantitative easing wasn't stimulative. To me, it's amazing that this has gone on, and every time quantitative easing has been ended anyplace, like in America, or like in Britain, or like, most recently, in Europe, things there got better real fast after they stopped it.
Why? Because the depressive contractive stuff stopped and you got back to more normalcy. Then the other parts are the fear of the politicians, whether it's Hillary Clinton, or Donald J. Trump, or, or, or... People think politics has more power than they should. People think the Fed has more power than it should, and they don't just kinda get the notion that markets and the economy have a will of their own, and they can't see that, even though it's right in front of their face, so I think the degree to which they can't see it is what surprises me, and what has surprised me throughout this.
I've kind of-- How do I say this most simply? Most simply, I'd say... I've been a little disappointed that the world can't learn faster. [Srinivas] What about the changing nature of the news media and the speed at which information is disseminated, falling barriers to entry in quote, unquote "journalism," things like Twitter.
Has that changed investor sentiment and how investors react? [Fisher] I don't know. Journalism's had a tough time for a long time. The journalism world is very different than it was when I was young. It handles things differently than it did when I was young. It struggles for financial survival. I mean, they've just financially had a very tough time.
The world of journalism is just actually much smaller than it used to be. There are many less journalists, there are many less newspapers. the newspapers are thinner. The stuff online is full of kinds of things you never used to see, much more opinion, much less hard news. The hard news is often depicted as opinion, and you could, as I think everybody knows, you could tune into the news, whether on TV, or online at CNN, versus let's say Fox, and you would see almost completely different stories, as if you were talking about two completely different worlds, and the people that like the one hate the other, and vice-versa.
Does that make us more strident as people? I think it does. Does that probably contribute a little bit to our dourness? Yeah, probably does, because we see a lot of stories we don't like. On the other hand, does it really change much in the long term? I don't know. I'm kinda skeptical of that. I've never believed that news really controlled markets.
I've more or less believed that news reflected markets. Thinking about that a different way, if you were to accept my latter statement, which I'm not sure is right, but if you were to accept it, and if you were to accept that this bull market has been very long, and we still haven't gotten to euphoria, then what you would expect is when we finally get to long enough, big enough, strong enough, that we do get to euphoria, you would expect to see the media flip toward euphoric stories, which is what the media used to do.
[Srinivas] Well, that begs the question, how much longer can this bull market go? How much longer until we hit euphoria? [Fisher] There's no rules about that, because all you gotta do is have enough stuff to keep people from... It's not like biological stuff. People always, because we're biological beings, try to compare it to things that are lifelike, as if there was a death number.
You know, one of my grandkids, when she was little, would say, "G'pa, what's the death number?" It meant she was kinda fishing for when, you know, when were the ageds in her life gonna die, or when's she gonna die? And the answer is there is no such thing when it comes to markets. Bull markets die because you either hit euphoria, or because a big, bad, terrible thing that hadn't been pre-priced comes along, and knocks enough, surprisingly, off of global GDP to create global recession.
That could happen next year, or it might not happen for five, six, seven years, as long as the economy keeps chugging along without too much optimism, without too many people doing too many crazy things. They've gone a long, long, long time. Normally, what has happened in history, that's not happened in this cycle, is, before very long, people start to get wild and crazy, and we haven't had a lot of wild and crazy people remain.
They get a little bit optimistic, and then they pull back and get cautious, and then they get a little bit optimistic, and then they pull back and get cautious. I repeat, as I said earlier, it's just amazing to see that we're this far along in time and we haven't had any kind of robust IPO cycle at all.
You know, in my 1987 book, and in an upcoming USA Today column, I'm doing a modernized version of what I did in my Wall Street Waltz, 1987 book, which is, "IPO means It's Probably Overpriced," and my point being that the lack of a robust IPO world is actually a bullish sign. [Srinivas] Earlier you mentioned that investors were starting to get optimistic after 2017, and then we had all the volatility of 2018, a downward corrective move the early part of the year, and then another more steep one at the end part of the year.
Volatility, you've mentioned before, is always and everywhere possible for any reason or no reason at all. Looking ahead, can volatility be a depressant on investor sentiment? [Fisher] Oh, I don't think so. I don't think so. I think the way people are is today's volatility they feel and they forget all about yesteryear's volatility.
Markets aren't as volatile as they used to be. Markets aren't nearly as volatile as they were when I was young. It doesn't take-- It takes a lot more money to move the market now on balance than it did. Sometimes, markets get thinner, sometimes not. That's always been true. Markets bounce around like crazy.
Markets have always been volatile. Now we feel the current-- just like when you get punched in the face, you feel it right away, but the pain, you know, three years earlier when you got punched in the face, you don't feel anymore, and I just don't believe that volatility is any kind of a cause. Volatility is a result.
[Srinivas] So, looking ahead to 2019, what's your forecast for the year? [Fisher] This is a great year because last year wasn't. Let me just rattle off phenomena. When we've had a negative year in the global stock market, we've always had a positive year the next year, unless you had world war or global recession.
We're not gonna have either one this year, so you get a positive year. The correction that was almost biggest enough to be a bear market but wasn't, that ended on December 24th, or, depending on how you measure it, the beginning of the day after Christmas, was the closest correction, or bear-market bottom, to the end of a calendar year in measured history.
The aftermath of corrections in the next 12 months, on average, is 34%. If you look at bigger corrections, it's a little bit bigger. The reality, therefore, when you look at the very nice bounce back, and as I described in my USA Today column, and the Financial Times, and in other places, when you get that steep descent like you-- we got in December, you get a "V"-shaped recovery bounce back, and that ascent, that-- the right side of the "V," the right side of the "V" ascent, which occurred strongly in January and into February, moderates a little bit as you get further along, just like the decline, or the descent in October, November, was less than the rate in December, but it still keeps chugging along, and yet still, if you look at that, we oughta have at least another 20% ahead of us, just to be normal.
Then I make the point that there hadn't been a negative third year of a president's term since 1939, and that was as World War II started, and was only down 9/10 at 1%. You can go on and on and on with features, and it's just really hard to see what would stop this bull market from chugging strong in 2019.
Do I have a specific number? Now, that's a little bit like that thing about my granddaughter. You know, there isn't actually a number that's a right one, but this is a big year. [Srinivas] Can you explain the frequency of positivity of presidential third years? Why are they so positive? [Fisher] Well, I'm not positive about why they're so positive, but this is what I've always thought.
I've always thought that when you look at the history of the stock market, arrayed by first, second, third, and fourth years of presidents' terms, not all, but almost all the negative years are in the first and second years of the term. Typically, first and second years are about 50% negative, and when they're not negative, they're real big.
The first and second years are the most volatile in U.S. stock market history. We then move into a period, just like we did this last November, into a phenomena that creates absolute or increased relative gridlock, and in American political history, almost every major bill ever-- not all, but almost all-- big bills that go through Congress and get signed by the president, or just go through Congress, whether they get vetoed or not, happen in the first and second years, and big stuff scares people, creates volatility.
People hate losses more than they like gains. When we take from these to give to those, people we take from hate it more than the people we give to like it, and that stuff all happens in the first and second years, and then when you get to the third year, all that stuff quiets down, and Congress doesn't do much, and, suddenly, you get this falling uncertainty from the lack of political noise-- not political noise like "Trump bad, Trump good, we hate Nancy Pelosi," all whatever that kind of noise is.
I mean, noise of actual legislation that might actually do something to you, and people keep looking like they're doing now, not to what's immediately ahead in Congress that would impact their pocketbook, or their regulation, or how they conduct business, or how they get a home mortgage, but instead, they start looking more and more toward the presidential election that's off toward the end of the following year, and you get this quieter phenomena of falling uncertainty that leads to that third year being positive.
Basically, it's a statement that I have said over and over again, which is gridlocks good, and more gridlocks better. [Srinivas] Ken, anything else you'd like to add? [Fisher] Only that, as I said before, last year being a bad year hugely increases the likelihood of this being a good year. That simple phenomena is so basic that it's very hard for people to get it in their bones.
What happens in a bad year is people tend to want to get defensive, hunker down, look for more bad, expect more bad ahead, and that's exactly the condition we had at the beginning of the year, where the optimism of 2017 had turned into heavy skepticism. The fact is, we haven't yet come back to embrace optimism, and until we do, this is gonna be a great year.
[Srinivas] Ken, thanks very much for joining us today, and thanks to all of you for tuning in. For more of Ken's insights, I invite you to follow him and his over 300,000 other Twitter followers. His Twitter handle is @KennethLFisher. For more, please visit marketminder.com. Thanks for tuning in. [woman] Investing in securities involves the risk of loss.
Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher Investments, and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis, or reconsideration. Copyright, Fisher Investments 2019.
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