Interactive Investor

Ken Fisher: The pros see blah, I say bull!

25th July 2014 00:00

Ken Fisher from ii contributor

In January, I shared my prediction for 2014 returns: Up big! The world economy was humming, the Fed's quantitative easing nightmare was ending soon and politics were quiet.

Best of all, almost no one expected a great year. Professional forecasts were blah. Bears were less bearish, but bulls were less bullish. Most saw mid-single-digit returns in the US's S&P 500 - a great sign stocks would be extreme, and the world looked too strong for extreme down.

So what do those same pros think with the S&P 500 finishing the first half up 7.1% in US dollars?

They're still blah! US financial rag Barron's queried a handful in its "Midyear Roundtable." The "bulls" saw another 5% - at the most - by year-end. The rest saw a 10% drop or more. No big up, no big down. Just up a little, flat or down a little.

We saw the same thing last year. In January, most pros expected stocks to gain 5% to 10% in US dollars. By June 30, the S&P 500 was up 13.8%, already exceeding expectations. But when Barron's checked in, these folks were still sceptical. They thought the first half would be as good we'd get. Wrong! The S&P finished up 32.4%. You Brits saw world stocks rise 24.3% in Sterling. A fantastic year.

The Great Humiliator

This isn't coincidence. Stocks live to humiliate as many people as possible out of as much money as possible - this is why I call the market The Great Humiliator. A herd of pros expecting similar outcomes are a juicy, easy target. Ripe for delicious humiliation.

It all goes back to the efficient market. Stocks don't just price in earnings announcements, economic releases and Fed statements microseconds after they come out. They also discount widespread opinions. Fears, hopes and expectations. So those muted pro forecasts are priced. Stocks are overwhelmingly likely to do something different. Stocks don't move on expectations. They move on surprise.

This alone doesn't tell you what stocks will do. Just what they probably won't do. It's a tool to narrow the range of possible outcomes. You still have to look around the world - at economics, politics and sentiment - to figure out which of the remaining outcomes is most likely.

Today, like January, you can cross anything muted off the list of possibilities. No up a little, no flat, no down a little. Stocks are still likeliest to do something extreme.

Melt-up!

But probably not extreme down. Bull markets are vectors - they run on until they lose steam in euphoria or hit a wall. There is no euphoria today. Not when pros think stocks look sad and most of the world agrees. Nor are there walls - unseen risks that could whack a few trillion of global GDP. Possibilities, but not probabilities. This isn't a time for a meltdown.

It' s time for a melt-up! The world is growing, earnings are up, revenues are up, and politics have a nifty surprise. This is a US midterm election year - when yanks pick a new Congress halfway through the president's term. Midterm years are usually back-end loaded. S&P 500 fourth-quarter returns have been up 86.4% of the time since 1925, with those positive returns averaging 9.5% in US dollars. Only two fourth quarters were down - one during the 1930 crash and a smaller drop in 1978. Better still, the next two quarters are also up 86.4% of the time as markets slowly realise midterms mean more gridlock. Great for stocks - it means Congress can't pass anything radical and dumb that interferes with property rights or takes resources and capital from one group to give to another. Stocks hate legislative risk and love a do-nothing Congress.

If you're tempted to wait for the election in November, don't - stocks are forward-looking. Buy now and be ready with stocks like these:

Major, mega-cap drugs are high on my list right now. In this cycle, I expect a takeover trend, and big pharma is ripe for the picking. Example? Buy Eli Lilly, America's tenth-largest druggy. Ripe! So many great products: Cialis, Cymbalta and Humalog, to name a few. So many cuttable costs! But it's good without any takeover, too, at 17 times my 2015 earnings estimate, with a 3.3% dividend yield. Near identical logic applies to Bristol-Myers Squibb - but don't double up.