How long will Shanghai and other cities’ Covid outbreaks last? Will astronomical oil prices slow China’s already sluggish growth? What about tech crackdowns and U.S. delisting threats? Rising global inflation and interest rates? Impacts from the war in Ukraine? Or, November’s American mid-term elections? Early 2022 ushered in seemingly ubiquitous uncertainty — which stocks famously hate. But don’t despair. The first-quarter fog — now pre-priced into stocks — will lift this year, catalyzing Chinese stocks’ long-awaited rebound. Don’t fear today’s uncertainty. Embrace it as a chance to buy before the haze clears causing stocks to rise.
The old adage that stocks hate uncertainty is true — partially. Stocks hate high and rising uncertainty. High but falling uncertainty, however, is the absolutely best stock market fuel. And that is dead ahead now — even amid 2022’s often scary first half.
Take the tragic conflict in Ukraine and the West’s response to it. Both amplified the early choppiness, but neither changes the road to the big second-half relief rally I forecast in December. Yes, the path of war remains unknown. But clarity is emerging regarding coldhearted markets’ chief concern: energy. That is a big reason oil is over 20% off its early March peak and Asian liquefied natural gas is down 39%. Even coal — less impacted by the war — is 11% off its high.
Markets now know China, India and others aren’t ditching Russian crude. It isn’t off the market. Clarity! They also know Russia isn’t stanching oil and gas shipments to punish its foes — no surprise given those revenues account for over a third of Russia’s own budget. More clarity! Markets have priced America’s and the UK’s mostly symbolic, economically meager Russian oil bans, too. You guessed it — even more clarity.
Some energy uncertainty surely remains. For one, talk of a European ban lingers — far more significant given the continent’s heavy Russian oil and gas reliance. But Germany, Austria and other countries’ opposition to oil and gas bans is important information — it lets markets more easily pre-price bans’ probability. With current talk focused not on oil and gas but coal — which accounts for only a tenth of Europe’s energy usage — that probability looks low. Regardless, full clarity comes soon. In a few months, we will either have lower fuel prices — or markets will have gotten used to them being high … and moved on.
Uncertainty over lingering domestic issues preoccupying Chinese stocks is also starting to ease. Worries about Evergrande triggering a default cascade hovered over Chinese markets since September 2020. That didn’t happen — and now Evergrande’s deal with big offshore creditors is moving debt restructuring talks forward. Similarly, uncertainty over America’s longstanding threat to delist Chinese stocks probably has peaked. China’s Securities Regulatory Commission has told accounting firms to prepare for joint audits, a sign of progress on the dispute’s core issue. As with Evergrande, negotiations continue. Snags could emerge. But every step forward reduces uncertainty — draining far-flung, worst case scare stories’ power.
Autumn’s 20th national party congress will help speed uncertainty’s decline. In advance, the government is signaling strong economic support — with Vice Premier Liu’s March comments suggesting the Tech crackdown is ending. Covid lockdowns? They are unpredictable. But their economic impact isn’t. Markets know from past Chinese lockdowns, America’s, Europe’s and the world’s that they are temporary, with sharp slowdowns reversing fast when restrictions lift.
Globally, a source of mega uncertainty will soon start fading, too: America’s November midterm Congressional elections. As I detailed in December, shrill campaign rhetoric spikes uncertainty early in midterm years — weighing not only on U.S. stocks but worldwide. Yes, China, too! Each side’s candidates promise big changes that scare the other’s voters. This year, pledges will be even more extreme and the shrieking even more shrill than usual, given this is the first election since America’s decennial Congressional redistricting. Republicans and Democrats alike redrew districts to protect their incumbents — meaning they have little need to woo opposing parties’ voters by moderating. It is just the opposite: Incumbents’ biggest challenges will come from within their own parties, pushing them to court fringe voters with extreme views.
But the long-awaited redistricting results themselves also kick off clarity’s climb, narrowing the focus to a small number of contested races. As campaigning progresses, markets will now pre-price probable outcomes. The president’s party almost always loses seats in midterms, and this year that means President Joe Biden’s Democrats likely losing one or perhaps both Congressional chambers—assuring hardcore gridlock.
For stocks, gridlock is the ultimate uncertainty remedy. It renders governments incapable of generating the consensus needed to pass big legislation — and big legislation often creates winners and losers, spooking investors because a well-documented part of behavioral psychology is that investors hate risk of losses much more than they love potential for gains. A gridlocked government also lets businesses better plan for the future. Knowing the rules are unlikely to change, they grow more comfortable deploying capital to spur future growth. Investors do, too.
Political biases blind most investors to midterms’ gridlock market magic. But expect the reality to dawn fully on investors sometime in 2022’s back half, with plunging U.S. legislative uncertainty turbocharging stocks worldwide. Well-known, pre-priced headwinds like inflation, Ukraine and Covid shutdowns lack sufficient surprise power to prevent it.
Global stocks’ rebound since mid-March may already reflect shrinking uncertainty in China and abroad. But in the short term, more wild wiggles could win out. Don’t let them sway you. As I often say, trying to time markets’ short-term swings is folly. I have never seen anyone do it with any consistency — and I am not alone. One study of 363 Chinese stock funds from 2003 — 2014 found just one that demonstrated statistically significant market-timing prowess. One! Don’t bet on it to prevail in the future either. At gambling … someone always gets to be the rare lucky big-time winner… but most lose.
Remember: Through the first quarter, Chinese stocks have returned more than 9% annualized over the past 20 years — a 469% total return that includes every single stomach-churning bear market, correction and mini-dip. Hence, preternatural timing isn’t a prerequisite for meeting your financial goals. But selling low and missing out on stocks’ big rebounds is a good way to fall short of them.
Uncertainty breeds stress — but it doesn’t last forever. Relief is coming. In the meantime, know that certainty and clarity come at a cost. An age-old saying goes that if you want clarity the stock market is a very expensive place to get it. Another is, “sell on the fear, buy on the news” — because by then it’s priced in markets. Note, the global market is nicely higher than the day Russia invaded Ukraine — same point. By the time certainty or even increased clarity arrive stocks are usually far pricier, far higher than when frustratingly foggy futures reigned. That makes those who buy during the haziness doubly happy when it clears.
Ken Fisher is the founder and executive chairman of Fisher Investments.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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