Investor sentiment has become increasingly pessimistic, to the extent that many are overlooking the positive things that are happening, says Ken Fisher in a video on Fisher Investments’ YouTube channel. Case in point: loan growth has been steady at a robust 8% per year, even with higher interest rates. But that positive fundamental is being ignored, Fisher says.
Some positive fundamentals are contrarian, such as Europe’s overall growth in the face of raging inflation and issues stemming from the war in Ukraine; if the E.U. can continue to grow in spite of those headwinds, then it’s unlikely the entire global economy will go into a decline. Likewise, China’s Covid lockdowns are starting to loosen, which is another positive, but many are reluctant to view it that way and quick to point out that another Covid surge could result in more lockdowns. “Every positive,” Fisher says, “seems to be met with a ‘yeah, but.’”
The economy is actually seeing a low, but steady, growth, and that’s evident in the yield curve that’s spread between 90-day and 10-year rates, which is wider than it was earlier in the year and higher than it was a year ago. That fact is often met with a “yeah, but—the Fed is going to raise rates,” but those rate hikes aren’t actually that big when compared with past rate hikes. And more often than not, rate hikes are not met with bear markets.
Another overlooked positive: the supply-chain issues that caused bottlenecks and demand problems that are now starting to loosen. While the biggest firms were the first ones to crack those issues, those snarls are being unwound further down the spectrum to smaller firms. And though everyone seems to be fearful of future rate hikes, Fisher believes that those hikes probably aren’t big enough negative to send the economy into a deep recession. Instead, what’s happening is that growth has slowed down after the boom at the end of last year which was a result of the bounce back after Covid lockdowns.
The current U.S. market P/E could be looked at through the lens of an earnings yield; even factoring in inflation against growth potential, an earnings yield calculated 1 divided by 15 would bring in roughly 7% over 10 years—far above a 10-year Treasury bond at 3% or a corporate bond at 4%. While timing could be tricky, earnings yield is a fundamental that many investors aren’t considering, and Fisher encourages them to do so.