Ken Fisher: Liking What He Sees

Ken Fisher, the West Coast money manager, has been one of my professional correspondents on the markets for over a decade. His directness and knowledge of US market history are always stimulating. He is not always right, but he is never shy of nailing his colours to the mast. Of his many books, the one I find most useful is The Only Three Questions That Matter, which is a treasure trove of useful ideas on market behaviour. These are his latest views, courtesy of his regular column in Forbes magazine.


[private]“I like what I see: improving fundamentals plus skepticism: the classic ingredients of the second phase of bull markets. It’s a year since the bull market began, and I remain firmly bullish. I’m often wrongly called a permabull. I’m not one. In 25 years of Forbes columns I turned bearish for three extended periods: in 1987, in 1990 and between 2000 and 2002. Yes, I completely missed foreseeing the 2008 bear market. But that doesn’t make me a permabull”.

“When in doubt I am biased toward owning stocks. Stocks rise more often than not. Since bear markets are always followed by bull markets–which is a basic rule some investors seem unable to accept–it seemed to me basic to be bullish once the 2008 bear market was well under way. One year into the current bull market I like what I see: globally improving fundamentals plus strong societal skepticism. Snarky, cranky sentiment and better fundamentals are the classic ingredients of the second phase of bull markets”.

“Economic numbers globally and almost consistently keep coming in up and better than expected, while being largely dismissed in terms of significance. In part this is because the fastest recoveries from the recession are happening in the 25% of global GDP found in emerging markets countries. Maybe it’s unnerving that China and Brazil are leading us. Americans are way too U.S.-focused”.

“My Feb. 8 column cited the “pessimism of disbelief,” the tendency to see all news as bad, or, if good, as something likely to morph into something bad. (Typical formulation: Stimulus efforts either won’t work or will cause inflation.) You can see this pessimism in mutual fund flows: For three years there has been a migration into bond funds–mostly into government bonds for safety–just in time for long-term U.S. government bond funds to return a –17.5% in 2009. That’s fear”.

“For more on market sentiment, visit market blogs anywhere. The scepticism is wise-guy thick. Anyone posts something positive and they get pounded by the wiseacres. I love it. This is the wall of worry bull markets classically climb. So be bullish while the sentiment’s sour–and keep buying good companies at reasonable prices”.

My Comment: This effectively has been my stance for most of the last 12 months. We have had a market mired in pessimism as a result of the credit crisis in which the majority of investors have been unable or unwilling to credit the strength of the potential global economic recovery.

On fundamental grounds, the case for buying equities at today’s levels has now become fairly weak. The prospective 10-year returns for any investor returning to the market for the first time today are mediocre at best. However it is quite likely that momentum will now carry this bull market phase higher, as more investors come to regret having missed the boat, and for those with the appetite for that kind of risk it is worth staying for the ride.

However, while remaining fully invested,  I am now more cautious and on the lookout for early warning signs of a cyclical downturn.[/private]