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Fisher Investments is a global money management firm serving prestigious institutions and thousands of financially successful individuals. Each quarter, under the guidance of the Investment Policy Committee, Fisher Investments publishes its independent research with in-depth analysis of the global economy and capital markets. Below, you will find the executive summary of its latest report. To download the full report, free and without obligation (beyond completing a short request form), simply click here. To access Fisher Investments' daily market commentary, please visit MarketMinder.com.

Stock Market Outlook

Executive Summary

The following is an early glimpse into Fisher Investments' Third Quarter 2008 Stock Market Outlook.

June wiped out what had been a great start to the second quarter. In our view, this was the third leg down in a triple-bottom correction — unusual, but not unprecedented. We think a major recovery lies ahead. Presidential election years tend to be back-end loaded, and we feel this one should be no different.

In our view, sentiment is as detached from tangible reality today as we can recall. “Grow-session” might best describe today. The economy is growing, yet it's people's moods that are recessionary. When investors realize economic Armageddon isn't upon us, we believe stocks should respond dramatically.

So what is positive in a seemingly gloomy world? Start with personal income, consumer spending, exports, and corporate earnings (ex-Financials). All are tracking well ahead of gloomy expectations.ⁱ In fact, the whole US economy grew by an annualized 1% in the first quarter. Not stellar, but not recession.ⁱⁱ Better yet, the other 75% of the world's economy grew between 3% and 4%.ⁱⁱⁱ

Unlike the January and March lows, June lacked novel negative stories. Instead, pundits rehashed familiar fears: housing, credit, Iran, inflation, oil, Obama. We think each is overblown. For example, the higher inflation many fear is highly illusionary today. Yes, energy and food prices have skyrocketed, but these make up less than a quarter of consumer spending. Housing, autos, apparel and technology make up more than double that.^iv And as we all know, prices of homes, as well as cars, computers, and clothing have been falling, helping offset rising prices elsewhere.

Many investors remember what was coined the Goldilocks economy during the 1990s — when growth and inflation were supposedly ideally balanced. Today is viewed as “anti-goldilocks.” People hate the status quo while fearing stimulatory policy measures will stoke inflation and restrictive ones will crush any hope of recovery — no way out. We view such an overly dour view as irrational and ultimately bullish for stocks.

As the Fed hinted they may begin raising interest rates, many fear a tightening cycle will drive stocks lower. However, there is no historical basis backing such a notion. In fact, we can find no convincing pattern that either tightening or loosening is inherently superior for stocks.

Uncertainty and fear tied to the upcoming presidential election is also overwrought. No matter the victor, neither Senators Obama nor McCain will have a super-majority in Congress, making the possibility of overreaching legislation unlikely. And while many fear severe negative consequences should capital gains and dividend taxes revert upwards in 2010, our analysis shows such tax changes rarely have the toxic economic effects many expect.

The world is not one without risks: protectionist interests could impede global trade; politicians could overhaul financial industry regulations; central banks could overshoot in either direction with monetary policy; war could break out across the Middle East. But right now these appear remote possibilities, not likely probabilities.

This year has been a bumpy and uncomfortable ride, but we strongly believe the second half of the year will be far better for stocks. A time when the world is fearful is a time to buy.

The Investment Policy Committee

Ken Fisher, Jeff Silk, Andrew Teufel

ⁱ Bloomberg Estimates

ⁱⁱ Bureau of Economic Analysis

ⁱⁱⁱ International Monetary Fund

^iv Bureau of Labor Statistics

The MSCI World Index measures the performance of selected stocks in 23 developed countries and is presented net of withholding taxes and uses a US tax basis. The S&P 500 Index measures the performance of 500 selected stocks in the United States. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.