How Ken Fisher Might View The Stock Market In 2018 – Seeking Alpha

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Several years ago I read Ken Fisher’s 2007 book, The Only Three Questions That Count – Investing by Knowing What Others Don’t. For those who do not recognize Ken Fisher by name, he is a money manager who runs approximately $72B in assets under his own firm. I found the book easy to read and understand. More importantly, there were several key takeaways for me when it came to predicting or anticipating market performance for the upcoming year. This article will look at some of Fisher’s concepts and see how they translate into market expectations in 2018. Additionally, I will see how Fisher’s analysis aligns with my technical analysis of the SP 500 index.

The first concept that appealed to me when reading Fisher’s book was how Fisher looks at the market in a very simple fashion. According to Fisher the stock market only does one of four things each year.

The market goes up a little (0% – 8%). The market goes up a lot (8% or greater). The market goes down a little (0% to -8%). The market goes down a lot (greater than -8%).

According to Fisher the market rarely goes down a lot. As a matter of fact the last time the SP 500 index was down greater than 8% was in 2008 when it returned a -37%. Consequently, investors should almost always have their money in the stock market according to Ken Fisher. Many times I have read on Seeking Alpha the refrain, “it’s time in the market, not timing the market” or something similar and that refrain echoes the idea that Fisher has that the market rarely goes down a lot. So based on that sentiment Fisher will most likely be invested in the market in 2018.

The second concept that Fisher uses is the Presidential cycle. He spends time showing the reader how the stock market has performed under the various years of a president’s administration. This upcoming year will be President Trump’s second year in office. According to Fisher’s analysis, the stock market has averaged an 8.3% return in the second year of a president’s term(Fisher 73). His data goes from 1925 to 2005. This data shows that there have been 20 such years (second year of an administration) with 12 of them being positive and eight of them having negative returns. Well, since 2005 there has been George W. Bush’s 2006 second year term and Barack Obama’s 2010 and 2014 second year terms. Table 1 shows how these years turned out.

Table 1 – Second Year of Presidential Term Total Return

President

Year

SP 500 Total Return

Bush

2006

15.79%

Obama

2010

15.06%

Obama

2014

13.69%

Source

The data from Table 1 only adds to the 8.3% average return since 1925. The last second year of a president’s administration that was a down year was 2002 when the SP 500 index was “down a lot” returning a -22.10%. So from a Presidential cycle point of view I think Fisher would say that investors should be in the market in 2018. It is noteworthy that Fisher points out that usually one of the two first years of a president’s administration is a down year. The question investors need to ask is whether 2018 could be a “down a little” or a “down a lot” type of year.

Earnings yield, or the earnings-to-price ratio, is another point of emphasis that Fisher has in determining whether or not an investor should be in the market. Using this ratio allows an investor to compare the relative value of stocks to bonds. The stock market’s earnings yield is the inverse of the price earnings ratio. The current PE ratio is 25.49. We know that this means that market is currently priced 25.49 times its earnings for the past 12 months. The inverse of the PE ratio is 1 divided by 25.49 or 3.92%. Fisher would compare that interest rate to the rate of the 10 year Treasury note. Currently, the yield on the 10 year is 2.378%. In Fisher’s analysis, investors will be getting a higher rate of return investing in the stock market compared to investing in the 10 year Treasury note. He would see this as another sign the stock market is undervalued and a reason to be long the market in 2018.

Another technique Fisher uses to determine if the markets are undervalued or if they are overvalued is by analyzing company acquisitions. Are acquisitions being paid for with cash or with company shares? Fisher believes that markets are undervalued if acquisitions are being done with cash. On the other hand, if companies are acquiring other companies using their company stock, that is a sign that the market is overvalued. In August, Amazon (AMZN) agreed to buy Whole Foods for$13.7B in cash. Earlier this year, Samsung (OTC:SSNLF) agreed to buy Harmon International in an all cash deal. Another example is Intel (INTC) agreeing to buy Mobileye for $15.3B in an all cash deal. While not all acquisitions have just involved cash, it appears that based on those three examples CEOs don’t feel that their stocks are overvalued.

While Fisher uses fundamental analysis, I am more comfortable using simple technical analysis to determine whether or not I should be invested in the stock market. Chart 1 below shows the SP 500 index using a 6 and 10 month exponential moving average. This is the go to chart I use in the monthly analysis of my retirement assets. Notice that both of the moving averages are trending higher with the shorter term moving average above the longer term 10 month moving average. In my monthly series I call that setup a bullish alignment and it tells me that the market has a high probability of going higher in the future.

Chart 1 – SP 500 Index Monthly Chart with 6/10 Moving Averages

In summary, it appears that Ken Fisher will be invested in the stock market in 2018. His default position is to be in the market unless you can discern that the market is expected to be “down a lot.” The Presidential cycle could cause concern for investors but the long term average is positive for all second years of a presidential administration going back to 1925. Thirdly, the earnings yield of the SP 500 shows the market to be undervalued compared to the yield on the 10 year Treasury note. Lastly, major acquisitions this year have been done using company cash instead of company shares. Ken Fisher’s fundamental techniques align with my technical analysis of the market. Both the 6 and the 10 month moving averages of the SP 500 index are trending higher with the 6 month moving average above the 10 month moving average. I look forward to monitoring the market in 2018 and will adjust as necessary.

Fisher, Ken. The Only Three Questions That Count – Investing By Knowing What Others Don’t. Hoboken, New Jersey: John Wiley & Sons, Inc, 2007.

Disclosure: I am/we are long SPY, IWM, EFA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.