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In Fisher Investments UK’s experience, some investors may overlook what we see as a useful, fundamental tool for informing portfolio decision-making: market history. In our view, understanding market history can benefit investors for several key reasons.

As an old saying often attributed to American writer Mark Twain goes, history doesn’t repeat, but it rhymes. Events like recessions (broad declines in economic activity), periods of fast inflation (rising goods and services prices), wars, elections, natural disasters, technological developments, financial bubbles and the like may unfold differently each time they happen. Yet Fisher Investments UK finds they often have commonalities, making it useful to look to the past as a guide for what can happen now. One reason for this: human behaviour hasn’t changed much, according to a wealth of behavioural finance research. Fear and greed still motivate investors, and when mass fear and greed are out of sync with fundamentals, it can be a powerful force propelling equities both higher and lower. Therefore, assessing current events and sentiment – and comparing them to similar past instances – can shed light on whether there is a bullish or bearish disconnect now, in our view.

Fisher Investments UK thinks using history as a basis to assess probable outcomes is a place to start when analysing economies and markets. Understanding history can help investors see today isn’t unique, which we find useful because what benefitted equities in the past may help in the present, too. For example, consider a market phenomenon we call the US Midterm Miracle, i.e., US equities’ tendency to rise after America’s legislative midterm elections. American market returns are positive in the fourth quarter of midterm years 83.3% of the time since good data began in 1925 – far above equities’ average frequency of positive returns in calendar quarters.[i] That positivity increases to 87.5% in the following Q1 and Q2.[ii] Our research has found developed markets are tightly correlated, so this American phenomenon can have a global effect.[iii]

Based on Fisher Investments UK’s research, midterm elections tend to create political gridlock – lowering the likelihood of major legislation that can stir uncertainty, which we have found can weigh on equities. We think gridlock leaves the status quo largely intact, allowing equities to move on – underpinning their frequent positivity in the aftermath of US midterm elections. Meanwhile, our research shows political bias causes many to overlook this historical reality and presume whichever party is in power can be the exception to the trend, so it isn’t preemptively incorporated into share prices (that is, pre-priced) – providing an investing edge, in our view, for those who do understand this history.

Or consider another phenomenon we call the Bounce Effect. We have found equities hit hardest in market downturns tend to bounce highest in recoveries. This, too, recurs throughout history, based on Fisher Investments UK’s research. Consider equities’ returns during and after recent global bear markets (a bear market is a prolonged, fundamentally driven market decline of -20% or more). In the early-2000s global bear market, for example, Tech equities fell -74% versus global equities’ -54%.[iv] Tech subsequently rose 44% in the six months after the bear market’s low, outperforming world equities’ 32% in that time.[v] Similarly, in 2007 – 2009’s global bear market, Financials – down -66% versus the world’s -38% – soared 93% in the six months after that bear market’s low versus world equities’ 36% rise.[vi] We think understanding this phenomenon can help set expectations during and after a bear market – and help investors position portfolios accordingly.

Finally, we think history can offer insights into what isn’t widely known or appreciated, so questioning widely accepted views can provide an investing edge. To do this, ask what you can fathom that others find unfathomable – and history can inform this mindset, in Fisher Investments UK’s view. For example, natural disasters such as wildfires and storms often gain widespread attention as potential economic and equity market risks. This is easy to test using history, in our view. Our research shows that whilst natural disasters cause devastating human impact and structural damages, their impact on equities is muted historically. Consider 2005’s Hurricane Katrina – America’s costliest natural disaster (based on resulting damages measured in USD).[vii] US equities rose 5.1% in USD three months from Katrina’s landfall, and were up 8.9% after 12 months.[viii] Meanwhile, the storm’s damage did not cause a US economic recession, nor have other large storms throughout history, according to our research. Whilst we don’t deny natural disasters’ devastating human impact, Fisher Investments UK thinks many investors find their relatively muted effect on equities difficult to fathom – particularly after such events crush sentiment. In our view, understanding natural disasters haven’t historically crushed markets can instil some discipline when a future one arises and stirs warnings about the broader fallout.

Then, too, we have found investors tend to remember things that rarely occur whilst forgetting things that happen regularly – such as thinking regional wars will crush global equities (a historical rarity, based on our research) whilst disregarding recurring events like the aforementioned Midterm Miracle. Fisher Investments UK thinks understanding this allows investors to tune out distractions and focus on probabilities, not possibilities – the basis of sound investment decision-making, in our view.

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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

[i] Source: Global Financial Data, Inc., as of 21/6/2022. S&P 500 total return, 31/12/1925 – 31/12/2019.

[ii] Ibid.

[iii] Source: FactSet, as of 14/7/2023. Statement based on correlation between S&P 500 Index price change in US dollars and MSCI European Economic and Monetary Union (EMU) Index price change in pound, 13/7/2003 – 13/7/2023. A correlation coefficient measures the relationship between two variables and ranges from 1.00 to -1.00. A 1.00 coefficient means the variables always move together, zero means there is no relationship and -1.00 means they always move in opposite directions.

[iv] Source: FactSet, as of 14/7/2023. MSCI World Index and MSCI World Index Tech sector returns with net dividends in pound, 18/9/2000 – 12/3/2003.

[v] Ibid. MSCI World Index and MSCI World Index Tech sector returns with net dividends in pound, 12/3/2003 – 12/9/2003.

[vi] Ibid. MSCI World Index and MSCI World Index Financials sector returns with net dividends in pound, 12/10/2007 – 7/9/2009.

[vii] Source: National Oceanic and Atmospheric Administration, as of 9/5/2018. Hurricane Katrina Tropical Cyclone Report. Figure presented in USD.

[viii] Source: FactSet, as of 17/7/2023. Statement based on S&P 500 Total Return Index in USD, 25/8/2005 – 25/8/2006. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.