StockMarket Outlook Us

Past performance is no guarantee of future results.
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A risk of loss is involved with investing in stock markets. Fisher Investments Q3 2014 Stock Market Outlook
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Confidential. For personal use only. Email: info@fi.com Website: www.fisherinvestments.com
J uly 2014
Stock Market Outlook Q3 2014
July 14, 2014
Global stocks gained steadily in Q2, bolstered by economic data affirming the economic
expansion remains on track despite Q1 weather-related weakness. The MSCI World Index rose
4.9% during the quarter and is up 6.2% for the years first half, already exceeding many too-
cautious forecasters full-year expectations.
i
Each new market high is met with disbelief and
fears of heightsin our view, a sign investors have yet to embrace optimism. This leaves plenty
of room for sentiment improvement ahead, as we highlighted in our 06/23/2014 commentary,
There Is Nothing Magical About Record Highs.

Markets have been clocking one all-time high after the next, which may make it
seem logical to presume markets are now highespecially with headlines
haranguing about the allegedly dreary state of the world. But bull markets tend to
set many new record highs along the wayits a function of their tendency to,
you know, go up. Determining when stocks are actually high and not time to
buy will take far more analysis than looking at an index level, which holds zero
predictive power for future market direction. How folks react to market
movement, however, can give you a clueits a sign of sentiment, and in our
view, sentiment surrounding recent records suggests this bull market has plenty of
new highs ahead.

Since the bull began, the MSCI World Total Return Index and the S&P 500 Total
Return Index have hit 62 and 106 all-time highs, respectively (as of market close
on 06/20/2014). (Exhibit 1 and 2) Plenty other indexes have steamrolled through
round numbers, landmark levels and all-time highs, too, and many major financial
publications are on big round-number watch: Dow 17,000, S&P 2,000. The
NASDAQ is inching toward its Tech Bubble-era peak. The FTSE 100 is also very
close to its 1999 record high (6,950.60). Germanys DAX just marched past
10,000.

Past performance is no guarantee of future results. Page 2
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Exhibit 1: MSCI World Total Return Index

Source: FactSet, as of 6/23/2014. MSCI World Total Return Index, 3/9/2009-
6/20/2014.

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Exhibit 2: S&P 500 Total Return Index

Source: FactSet, as of 6/23/2014. S&P 500 Total Return Index, 3/9/2009-
6/20/2014.
Now, the correct interpretation is simple: Past returns dont predict future
performance. All-time highs are just things that happen as markets rise, which is
what markets tend to do more often than not. Yet rather than seeing all-time highs
as normal in a maturing bull, the media seems more intent in puzzling over why
theyre happening. They see it as a sign of disconnect with what they see as a
still-troubled world: Ukrainian troubles, Iraq, bouncy economic data, the Fed
supposedly dialing back its so-called stimulus and the likeirrational exuberance,
if you will. Yet the world has been imperfect since right about the dawn of
always. Stocks simply do not need a pristine economic or geopolitical
environment to advance, whether to new highs or to bounce off the bottom of a
bear. That stocks are rising amid strife and turmoil isnt a sign investors are blind
to risk. It is just stocks doing what stocks do.

Fears accompanying all-time high announcements is a good signit means we
havent reached the confetti-dropping bullish celebration of our supposedly new
economy that typically happens when markets are euphoric.

J uly 2014
Improving sentiment against a better economic and political backdrop than most appreciate
should continue pushing stocks higher in the second half, resulting in a back-end-loaded, up-a-lot
year.

2014 is a US midterm election year, which historically see the strongest push in the back of the
year. Midterm elections usually result in gridlock. Since 1932, only twicein FDRs and George
W. Bushs first termshas the Presidents party gained seats in both houses during a midterm
contest. All other times, the President has lost relative power, reducing the risk of sweeping
legislation interfering with property rights or distribution of wealth and income. And this years
Midterm elections will also likely result in gridlock, as we detailed further in our 04/17/2014
commentary, A Peek at 2014 Midterm Elections Potential Impact on Your Portfolio.

For gridlock to end, the Democrats would need filibuster-proof majorities in both
houses. This is exceedingly unlikelystructure and history favor a split Congress.
The Senate contest favors a continued but smaller Democratic majority.
Republicans have fewer seats to defend, and history shows the Presidents party
tends to lose seats during midterms. However, to gain a majority, Republicans
would need to pick up six of the 21 Democratic seats up for re-election and
defend all 15 of their own. Republicans defense looks easy compared to
Democrats, considering GOP-incumbent races are largely in traditional
Republican strongholds. The Democrats must defend six seats in states that voted
Republican in the last four Presidential contests. Sweeping these would require
the Republicans to repeat their landslide victories in 1994 and 2010not
impossible, but it would take near-flawless campaigning. In our view, the most
likely outcome is a slim Democratic majority. In the House, structural factors are
somewhat reversedthe likely outcome being a continued but smaller
Republican majority. Since incumbents are hard to beat, the key is to look for
open seats. As of April 11, 2014, the House has 18 open seats13 Republican
and 5 Democratic. For the Democrats, winning a majority would require taking all
13 Republican open seats, stealing one from a Republican incumbent and losing
zero. It wouldnt shock if the Democrats gained some ground, but the likelihood
they take the House is extremely low.

Less political risk is a big positive for markets. However, investors are slow to realize this. Most
folks get caught up in the campaigns rhetoric and polarization, increasing fears that loud
campaign pledges might actually come to fruition. After the election, however, the noise dies
down, Congress continues doing next to nothing, and investors eventually realize most promises
cant pass. This is a powerful force for markets in midterm years second halves, particularly
fourth quarters, which have been positive 86.4% of the time since 1925significantly higher
than stocks historical 68% frequency of positive quarterly returns.
ii
This effect extends over the
following quartersthe first and second quarters of post-midterm years are also positive 86.4%
of the time (a bizarre coincidence).

As folks look out over the next year, few fathom how strong it can be. Many investors remain
wary of this bull market, continually checking for signs of a top. While there is always a chance

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some unseen risk could materialize and knock the bull off courseand we always watch for
thiswe dont see anything material enough to derail the many positives supporting stocks.
Investors lingering skepticism combined with the underappreciated midterm effect and positive
economic fundamentals tells us this is not the time to brace for a peak or wait for a pullback to
put cash to work. Underestimating markets can carry significant opportunity cost, as Managing
Editor Todd Bliman discussed in his 06/09/2014 column, The Cost of Trying to Time
Corrections.

While many investors dont think of it this way, opportunity cost is money lost.

As this bull market matures, the punditry seems continuously engaged in advising
you otherwise. Its driving countless would-be investors to play a
counterproductive guessing game: sitting on piles of casha low-yielding asset
class that doesnt match many investment goalsas they await a correction (a
short, sharp, sentiment-driven dip of 10% or greater). If you require growth in
order to reach your goaland if youre trying to fund retirement, build wealth or
an inheritance, or ensure your savings earn returns that outpace inflation, chances
are you doyoud be better served to align your strategy with that than a guess
about future volatility.

My sense is this sentiment is partly a lingering fear of heights and partly that folks
dont want to be stung by buying in and seeing red, even if its fleeting. Some
investors likely rationalize these emotionssaying theyre simply trying to wait
for a lower entry. But there is a big risk here: Timing a correction amounts to
trying to time other folks emotional flips and flops.

The risk is the same as if you went down and soldyoure missing money that
would otherwise be there. A $100,000 investment in the MSCI World Index made
the day the last correction in this bull market ended (J une 4, 2012) would have
grown to $155,628.70 as of J une 4, 2014.
iii
So not investing back then currently
carries a sticker price equivalent to a fully loaded, V6 2014 Acura MDX. Or
$3,000 cash and a brand new 2014 Audi Q7 TDI Premium (theyre flashy). Or a
bit more than a years tuition, fees and books at Columbia University! (Also
flashy.) Maybe your goals are less flashy than these luxuries. But allowing cash to
sit idleout of step with your growth goalis a mistake whether those goals are
to rent Versailles for your daughters wedding or just ensure youre not living in
your daughters basement a few years later, wherever she was wed. (Not flashy.)

You wont see this perspective most anywhere else. As stocks clocked new highs while tensions
flared in Iraq, eurozone growth slowed and new data revealed the US economy contracted at a
-2.9% seasonally adjusted annual rate in Q1, headlines warned of stocks apparent complacency,
saying returns were too detached from reality. Yet stocks tend to brush off occasionally bumpy
economic datano expansion is ever a smooth ride up. Plus, while the latest US GDP reading
wasnt the brightest, its likely just statistical noise, as we detailed further in our 06/26/2014
commentary, Frozen: This Is Not a Kids Movie.

J uly 2014

On its surface, the third estimate of Q1 2014 US GDP was bad. GDP contracted
by a -2.9% seasonally adjusted annual rate (SAAR), down from the -1.0% SAAR
contraction in the estimates first revision. Though headlines focused on the drop
being the biggest since Q1 2009 (during the last recession), the consensus blamed
Mother Naturea sensible take, in our view. However, a sizable (and noisy)
skeptical minority suggested the dip was really a sign the US economy is still
inherently weakleaving it vulnerable to shocks. If it really were in good shape,
the winter chill wouldnt have, um, chilled. If wed reached escape velocity
(whatever that means) wed rocket right through snow, ice and arctic temps.
(NASA technicians would probably suggest otherwise, but perhaps were being
too literal.) But a look under the hood suggests that while things certainly werent
rosy, in our view, they seem fleeting. And looking ahead, fundamentals suggest
more growthand bull market fuel.

The polar vortexs impacts were still easy to see in the final reading. While the
dip in residential real estate activity was less severe than initially reported (-4.2%
SAAR versus a previously reported -5.0%), non-residential real estate was revised
to a bigger drop (-1.6% vs. -1.2%). Consumer spending grew only +1.0%, down
from the earlier-reported 3.1% growth. And spending would have fallen further if
not for the single biggest positive contributor to GDP, Housing Services and
Utilities consumption. Households cranked the heat! Another sign, sales of
nondurable goods were revised to -0.3% from +0.4%. Trade was another attention
grabber. Exports were revised down from -6.0% to -8.9%, while imports were
revised up from +0.7% to +1.8%. Since exports add to GDP and imports detract,
both detracted from headline growth, to the tune of 1.5 percentage points. But
higher imports suggest domestic demand was healthier than initially thought. And
those export figures could be impacted by weather to an extent. Getting stuff
abroad or people here (tourism is an export) can easily be hampered by snow at
airport hubs or ice in major seaways. None of this is good, but its all unsurprising
given cold weather can keep shoppers indoors, snow makes shipping goods harder
and rain makes constructing homes and office buildings difficult.

Weather isnt the only culprit: Health care spending got whacked. After a +9.9%
increase in the second revision, the latest showed a -1.4% dropcontributing to
services spendings big downward revision from 4.3% growth to 1.5%. But this
seems tied to the Affordable Care Act rollout. The enrollment "deadline was
originally March 31. However, due to some technical snafus that hindered many
folks from signing up, much less paying for insurance (or for health care services
as they were waiting for payments to process), the drop dead deadline was pushed
back into Q2.

Some seemingly see Q1s GDP as the second leg down in the long-awaited,
never-arrived double dip. OK, thats partly our joke, but when you see the dour
word choice and hospital patient metaphors used, it seems to us theyre not giving

J uly 2014
much credit to five years economic growth and what was, until Q1, all-time high
GDP. Or the fact that we have already seen a dipping quarter in this expansion, to
no major ill effect. Or the fact private sector growth has easily outpaced headline
GDP through the expansion. No, say these skeptics, the US economy should be
strong enough to weather this bad weather, regulatory rollout issues and statistical
quirks. But there isnt any evidence a slower-growing economy is more likely to
tip into recession than a fast growing one. The critique we need faster growth to
forestall recession rests on the notion that we wont be out of the woods until we
hit some arbitrary rate some deem as the moment you escape gravitys pull. But
GDP isnt forward-looking and wont tell you very much about where growth
heads. And for stocks, those considering the present cycle may be thinking overall
slow GDP growth is bullish.

All this is an interesting-but-irrelevant-for-investors deep dive into old data. Q1
ranged between three and six months ago and, contrary to headlines
presumptions, stocks are forward-looking, a leading economic indicator, not a
coincident or lagging one. And other leading indicators suggest recession and
growth worries are overblown.

And stocks also have a long, long history of shrugging off regional conflicts, as we touched on in
our 06/16/2014 commentary, All Eyes Are on Iraq.

Whats happening in Iraq can best be summarized as a regional conflict. And
regional conflicts have historically had little lasting impact on global stocks.
Especially regional conflict in the Middle East. Take the two official Iraq wars. In
1991, global stocks were up 18.3%. And in 2003, stocks were up 33.1%.
iv
Both
featured oil production interruptions, with the former reducing Iraqi output for
years (associated with sanctions). The Israel-Hezbollah conflict in 2006. The
Syrian conflict. Egypts revolution. The many and varied conflicts in Lebanon.
We could, tragically, go on. The specifics of who is doing the invading of Iraq
today may be surprising, but that there is turmoil in Iraq and the broader Middle
East is not. These types of localized tensions are neither new nor unusual for
stocks. There just isnt much surprise power here.

That is not to say there is no impactits just that the impact is very unlikely to
be market-wide. Some global energy firms have projects in Iraq that are
theoretically now at risk. And its fair to say that if the conflict impacts Iraqs oil
production directly and/or damages these global Energy firms facilities, it is a
negative for them. But it also isnt as though these companies operated on the
notion Iraq was just like Texas, populated only by folks with a different twang.
These firms are well aware of the risks and rewards of operating in the Middle
East, and many insure themselves against loss.

In our view, the Iraqi scenario is worthy of consideration, but unless it materially
and broadly escalates from here, its unlikely to carry much lasting market impact.

J uly 2014

Many claimed stocks resiliency this time was a result of Fed policy masking their underlying
vulnerability, but this ignores decades of market history. Its normal for stocks to rise when the
world looks weakgeopolitical conflict and patches of sluggish (and occasionally negative)
growth are often part of the proverbial wall of worry bull markets love to climb. While there are
always risks, the time to worry most, in our view, is when headlines stop highlighting negatives
and start ignoring them.

Today, headlines continue ignoring the positive. Even with the USs GDP contraction, S&P 500
corporate earnings rose 2.1% y/y in Q1beating expectations for a small declineand revenues
rose 2.7%, illustrating the private sectors continued strength.
v
This, not GDP is what you own
when you own a stock, as we explained in our 06/12/2014 commentary, Paying Attention to
Earnings.

Little-noticed is the one piece of Q1-related news that actually would provide a
more investor-friendly snapshot of where the investible US private sector stands:
Earnings and revenue growth, which continued in Q1.

If this made the front-page, it would probably catch folks by surprise. In April, at
the outset of Q1 reporting, analysts estimated earnings would fall -1.4% y/y. They
figured that chill Mother Nature threw at much of the US would sufficiently
weigh on economic activityto the degree that public companies would actually
report shrinking earnings. This had some folks worried rising stock prices were
detached from reality. But with only three firms left to report, Q1 earnings growth
is +2.1%, with 74% of companies beating expectations. Sure, its a bit slower than
Q4s hot +8.5%, and it probably couldve been better had the Northeastern US not
temporarily returned to the ice age. But either way, its the 18th straight quarter of
growth. Further, 7 of 10 sectors were upbroad-based!

But you can get rising profits even when macroeconomic conditions are pretty
terrible. After all, firms could cut costs to get that result, which wouldnt imply a
healthy economyjust disciplined businesses. But that isnt what happened in
Q1. Revenues, a better gauge of private sector economic activity than GDP, also
roseand at a faster clip than profits. Revenues grew +2.7% y/y, with 9 out of 10
sectors in the black. Utilities led the waynot terribly surprising as many folks
turned up the heat during the cold winterbut Health Care (+7.7%), Consumer
Discretionary (+3.9%), Telecom (+3.6%) and Info Tech (+3.4%) all beat the
average. All in all, positive revenue growth nearly across the board runs counter
to the weak economy meme some in the punditry note.

But youre not hearing much of any of this! Instead, headlines are shouting about
a months-old fall in GDP. Perhaps these headlines do create some short-term
market sway as investors initially digest the news. But in the long run, they dont
hold much weight for markets. Since GDP includes factors like government
spending, net trade (exports less imports) and inventories (subject to interpretation

J uly 2014
based on other conditions), they dont paint an accurate picture of 2014 as it
pertains to stocks. You cannot buy a share of GDP. You can buy shares in
publicly traded companies, and the earnings and revenue stats show theyre
growing just fine.

Nor was economic weakness universal. The global economy grew 3% y/y in Q1 as Emerging
Markets surged and the UK led the developed world.
vi
Publicly traded firms appear poised to
continue doing well looking forward, with most US indicators showing growth resuming in Q2
as the impact of severe winter weather faded and loan growth continued its post-taper rebound.
The Conference Boards Leading Economic Indexone of the most reliable predictors of future
economic trendscontinued rising, fueled by the relatively steeper yield curve and credit
conditions.

Risks existthey always dobut there are no indications of sweeping monetary policy errors, a
surge in trade protectionism, a deeply negative regulatory change or other similar barriers to
more bull market. In our view, there is simply too much driving this bull forward for it to melt
downthis is the time for a melt up.

We will cover these topics and more in the forthcoming full Stock Market Outlook. To follow
our daily commentary on market and economic events, please visit www.MarketMinder.com.

The Investment Policy Committee
Aaron Anderson, Ken Fisher, Bill Glaser and J eff Silk

Commentary in this summary constitutes the general views of Fisher Investments as of
07/14/2014 and should not be regarded as personal investment advice. No assurances are made
we will continue to hold these views, which may change at any time based on new information,
analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any
forecast made herein. The MSCI World Index measures the performance of selected stocks in 23
developed countries and is presented net of dividend withholding taxes and uses a Luxembourg
tax basis. The S&P 500 Composite Index is a capitalization-weighted, unmanaged index that
measures 500 widely held US common stocks of leading companies in leading industries,
representative of the broad US equity market. Past performance is no guarantee of future results.
A risk of loss is involved with investments in stock markets.

i
FactSet, as of 07/01/2014. MSCI World Index returns with net dividends, 12/31/2013-06/30/2014 and 03/31/2014-
06/30/2014.
ii
Global Financial Data, as of 04/30/2014. Annual S&P 500 Total Returns, 12/31/1925-12/31/2010.
iii
Source: Factset, hypothetical growth of $100,000 invested in the MSCI World Index including net dividends,
06/04/2012 06/04/2014.
iv
FactSet, as of 12/31/2013. MSCI World Index Total Returns.
v
FactSet, as of 07/01/2014. Year-over-year growth in S&P 500 earnings and revenues.
vi
Source: Bank for International Settlements, 84
th
Annual Report, J une 29, 2014.

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