Ken Fisher stopped by the office the other day to tape an episode of Advisor TV and he brought some good market news.
I am a big fan of Ken. If you’re not familiar with him, he is founder and CEO of a successful money management firm based in California, Fisher Investments. He also writes a column in Forbes and has really interesting ideas about investing that often cut through the bull, or what he calls the “monkey chatter.”
So I want to call your attention to something in his latest column. Here is Ken quoting himself from a 1991 column about what the pundits where saying then after the S&L crisis:
“Supporting most bears right now is a bunch of bull: namely, the notion that too much debt will bite us in the butt. Since last fall the guts underlying gloom-and-doom market forecasts have been disproven one by one. Excessive debt is the main argument the bears still hug.
“Which is one reason the bull market has a long way to run—the bears are basing their case on a wrong argument. Debt doomers come in varying styles. There is the banking-crisis style and the real estate implosion style—often linked, as in “falling real estate prices will bankrupt the banks, which will cause chaos.” Then, too, are those noting the “tapped-out consumer” who can't or won't borrow, thereby causing an anemic recovery or no recovery, or finally, the pseudo-sophisticate's favorite—-the "double dip" recession.
“Believe it or not those last two paragraphs were written in 1991. They appeared in my Aug. 5, 1991 Forbes column entitled "Dumb Bears." They sound like I could have written them this morning.”
Remarkable isn’t it!
He also pointed out that Greece went completely insolvent in 1992 and no one blinked an eye.
It’s normal for all this debt-phobia, below-average-growth fears to be followed by a super boom in the market, perhaps like the one we saw in the 1990s, Ken said when he stopped by. In his new book Debunkery, he points out that $300 billion a year in interest payments on our debt may sound like a lot, but it’s pretty small as a percentage of GDP. Indeed, he says while debt is elevated, it’s not much higher than it was during the period of 1991 to 1998—“a time of overall economic vibrancy and fine stock returns.” Debt was much higher as a percentage of GDP from 1943 to 1955, also a period of relative prosperity.
He also shed some light on the recent mid-term elections and the stock market, flourishing a chart that showed for the six and 12 months following mid-terms, stock markets have been positive, impressively so (averaging 17.5%) in every year going back to 1938.
President Obama knows he has to get his biggest efforts done in the first two years of the term while he has some wind at his back, he explained. People—and the markets—don’t like change. “All legislation takes away from someone and people hate losses more than gains,” Fisher said. “In the first two years people react, they’re afraid about healthcare and financial reform and what’s going to happen to them. Political risk aversion rises by the summer before the mid-term.”
The Republican sweep this month was similar to Clinton’s ’92 victory, Fisher said. They won on the “It’s the economy Stupid” platform. “Now that they have no incentive to talk down the economy, the debate quiets and the people move from a position of high political aversion to low aversion and demand for equity rises,” Fisher said.
Gridlock, which often accompanies the second half of a Presidential term, is good for the change-averse markets. As for a drop in unemployment, Fisher produced charts showing how it always significantly lags a recession.
Meanwhile productivity in the U.S. is very high, partly because technology has made companies more efficient, which is also part of the reason we’re having a recovery without more employment gains. But greater productivity leads to higher profits and happy stock markets.
“There’s no reason why this decade couldn’t be just as good as the 1990s and stocks are cheaper now,” especially relative to bond yields, Fisher said. “We just stepped into a nice sweet spot.”