My favourite part of this autumn’s stock market volatility is the flurry of bull market ghost stories accompanying it.
Like the ghost tales of past, present and future in Dickens’ A Christmas Carol, these ghoulish stock market stories are told time and again during a bull market.
Like all widely known information, they’re priced in — but they still have power to scare. Hence, when they circulate widely, it is a sign that sentiment is too dour.
The QE Ghost
Take fears of eurozone quantitative easing ending next month. Whenever a central bank ponders ending QE, investors freak. It happened in Britain in 2012 and in the US in 2013 and 2014. How could economies grow and markets rise without more “stimulus”?
But each time, economies and markets improved after QE. UK growth, money supply and stocks picked up after the Bank of England ended QE in late 2012. The US also improved post-QE.
In the US, the Federal Reserve is unwinding QE, yet its growth outpaces most nations. People don’t see that QE depresses, as I’ve written here numerous times before. It is low interest rate, tight money. By artificially depressing long-term rates, QE flattens the yield curve — the gap between short and long rates. More than a century of data proves steeper yield curves, not flatter, boost growth.
Ending eurozone QE is a big positive. Expect steeper yield curve spreads, increased loan and quantity of money growth, and the return of a banking system that works more naturally. False fears of QE ending are one signal to buy, before everyone figures out that euroland will benefit.
The Populist Ghost
Remember when Greek populists were going to torpedo the euro four years ago? Or when the National Front was to ascend in France and wreck everything? Or, or, or . . .? At every turn, populists have fizzled, even when they entered government. As uncertainty has subsequently receded, stocks have been boosted. The latest populist Italian fears are no different.
Many fear the ruling Five-Star Movement and League will destabilise Italy’s finances, but as I wrote in June, Italy’s debt situation is better than appreciated — the country’s best in decades. Few fathom how populists evolve into relatively normal self-interested politicians. Believe it. As reality sets in, they moderate.
Italy’s current government has started toning down its anti-euro rhetoric. Its budget stand-off with Brussels still rages but is a tempest in a teapot. Their “radical” agenda includes a simple, two-tiered tax system that could reduce Italy’s rampant tax avoidance if implemented properly. A positive that is missed by those blinded by fears of a deficit.
Attitudes and rhetoric may be wild, but policies aren’t so disruptive. Then, too, it isn’t clear these parties can stop fighting each other long enough to pass anything big. Populist ghosts distract from the positive political reality in place: gridlock, which neuters radical legislation.
The Tariff Ghost
Tariffs put in place this year stirred visions of a destructive global trade war. This ghost has lingered since Donald Trump, the US president, campaigned on tariffs in 2016. Yet it’s easy enough to slay — just scale.
Tariff threats have increased since my July 25 column yet they are not disastrous. According to my calculations, both implemented and threatened tariffs affect a tiny 0.28 per cent of global GDP. That’s based on £766bn in goods potentially subject to tariffs, taxed at an exaggerated 25 per cent, relative to the International Monetary Fund’s £66.4tn GDP estimate. Whenever people toss out big numbers but don’t scale, a buying opportunity arises — simple maths proving fears false.
The Budget Deficit Ghost
The “end of austerity” Budget delivered by chancellor Philip Hammond caused more budget deficit grousing. But the deficit ghost is simple to dispel once you remember to take long-term forecasts with a grain of salt. Former chancellor George Osborne spent years failing to hit deficit targets, sparking fears every time. Yet UK stocks rose and the economy grew. Interest rates remain near generational lows and public finances are in fine fettle. Some see the budget deficit ghost as suffocating future debt, but I see a bullish false fear.
The Wage Ghost
Wage growth fears have been in the headlines again after wages barely outpaced inflation. But higher real wages are not a prerequisite for growth. Real wages fell for six straight years from 2008 to 2014. Consumer spending and GDP grew. People still saved and invested. Wage growth ghosts embody doubts about the UK economy which, while weak, is stronger than appreciated. That disconnect, too, is bullish.
I’ve cited other pesky ghosts in past months, like volatility, geopolitics and valuations. But they all render the same conclusion: don’t be afraid to own stocks today.
Ken Fisher is the founder and executive chairman of Fisher Investments and chairman and director of Fisher Investments Europe. Twitter: @KennethLFisher