Stock Market 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. Q4 2011 Stock Market Outlook Executive Summary
Copyright 2011 Fisher Investments. All rights reserved. Toll Free: 800-568-5082
Confidential. For personal use only. Email: info@fi.com Website: http://www.fisherinvestments.com
October 2011
Stock Market OutlookQ4 2011
Q3 was marked by a steep correction in global stocks that pushed the MSCI World Index down
-16.6% for the quarter.
i
Though periods of heightened volatility are undeniably unsettling, recent
market action seems very characteristic of a correction, not the start of a new bear market.
Consistent with our full-year forecast, we expect a strong fourth quarter and for 2011 to end up
or possibly down a little, though we anticipate ongoing volatility along the way.

Headlines were hyper-focused on a handful of negative stories to the exclusion of all else (a
common correction feature). Now, and nearly identical to 2010, the focus is on peripheral
eurozone debt and the possibility of recession. In our view, a new recession is unlikely
immediately ahead. Economic metrics globally remain expansionary overall, and expectations
broadly are for continued growth in 2011 and 2012. Lasting bear markets are historically rare in
the absence of a true recession. In our view, the slowdown in economic growth in Q1 and Q2 is
normal growth-rate variabilityits common for economies to slow the second year of a new
recovery before reaccelerating. Consider some points from our 10/03/2011 MarketMinder.com
cover story, When the Reality Is Mostly Fear:

US Q2 GDP growth was revised higher to +1.3%not gangbusters but growth
nonetheless. Q2 data are obviously backward-looking, but Q2s GDP reading is notable
as it was widely interpreted as slowingwhen, in fact, it accelerated from Q1s +0.4%
growth.
August US durable goods orders showed a smaller-than-expected headline dip to -0.1%
m/m, with automotive and defense orders the primary drags. But under the hood, core
capital goods orders (a gauge of business spending) rose +1.1% m/measily topping
analysts estimates of +0.4% m/m growth and accelerating from Julys -0.2% dip.
September ISM Chicago business barometer unexpectedly accelerated to 60.4 from
Augusts 56.5.
The Milwaukee ISM index dipped, but to a still-expansionary 55.4.
US weekly rail traffic rose +1.1% y/y in the week ending September 24. In 2011 to date,
rail traffic has increased solidly. In fact, intermodal shipping has grown +3.5% in 2011
and stands at a record high.

S&P downgraded Americas debt from AAA to AA+, based not on the countrys economic
outlook or ability to cover debt payments, but rather the political atmosphere surrounding the
debt ceiling debate. The downgrade had no adverse impact on long-term Treasury yields, which
actually fell further after the downgrade. We continue to wonder why anyone pays much
attention to the credit raters. Our 08/09/2011 MarketMinder.com cover story, After the
Downgrade discussed S&Ps downgrade and its impact:

In early press release drafts, S&P cited estimates of the USs future deficits as the
primary driver for the downgrade, but after discovering a $2 trillion miscalculation, they
adjusted their reasoning. Thus, the final statement cited political factors, namely the debt
Past performance is no guarantee of future results. Page 2
October 2011
ceiling debates prolonged controversy and political brinksmanship (in other words,
it took too long and Congress was too divided).

But that politicians are ineffective isnt news (nor unique to the US). And their
ineffectiveness says nothing about our creditworthiness. In fact, the cost to service our
debt is lower still nowlong-term Treasury yields fell after the downgradenot what
youd expect if the market believed default risk were higher.

Before the downgrade, one major fear was a lower rating would mean banks would have
to dump Treasurys and replace them with other AAA-rated securities. However, on
Monday, regulators quickly assured banks (and those who transact with them) the lower
rating will not increase Treasurys risk weighting. Instead, US debt retains its zero-weight
in the global banking complex, allowing banks to hold as much as they like without
raising additional capital. Thus, banks have no new incentive to dump Treasurys. Other
entities that might otherwise be inclined to sell Treasurys due to rules requiring them to
own AAA debt are small in comparison and will likely amend those mandateskeeping
US debt their most viable option. Further, two of the three major ratings agencies
(Moodys and Fitch) have maintained their AAA ratings.

Whats more, surely major Treasury investors dont rely on S&P (or Moodys or Fitch) to
determine whether they should own US debt. (After all, McGraw Hillthe company that
owns S&Phas a market capitalization of about $11.5 billion, while China alone owns
about $1.15 trillion in US Treasurys.) The decision to hold Treasurys is based on many
factors, most notably the Treasury markets depth and liquidity, which is unmatched. The
US accounts for about 55% of all AAA-rated sovereign debt (given Moodys and Fitch
havent downgraded the US).

Eurozone fears also spiked again in Q3 and have now been rehashed by investors for the better
part of two years. A voluntary restructuring of Greek debt was proposed during the quarter, and
additional restructuring may well be needed in the near future. But as weve noted, Greeces
problems are manageableits the larger peripheral countries, Italy and Spain, that really matter.
Fundamentally, Italy and Spain are on much sounder footing now than Greece. Whats more,
though the process has been slow and fraught with politicking, eurozone officials continuously
prove their willingness to do whats necessary to maintain the unionat least in the near to mid-
term. We covered some of the latest developments in our 09/30/2011 MarketMinder cover story,
Easing On Down the Eurozone Road, detailing the eurozone struggles to approve the EFSF
expansion and some positive fiscal developments in Italy and Spain:

Thursday, Germanys lower house of parliament easily approved the EFSF expansion
proposed in July. Finland, too, fell in line with the proposed expansion just the day
before, backing it without (as many had feared) explicitly demanding collateral from
borrowing countriesalthough they left the door open to further consideration.

Many had presumed the German vote would be tight, with Chancellor Merkels
CDU/CSU coalition potentially fracturing and forcing her to rely on opposition parties to
October 2011
see the proposal through. But the proposal managed to clear with a razor-thin absolute
majority in her own coalition with 315 votes, while the overall vote was overwhelmingly
in favor of the plan (523 for, 85 against and 3 abstaining)a comfortable margin of
victory in the Bundestag. The bill now goes to the upper house (Bundesrat) Friday for a
non-binding vote. However, it would be unlikely for the Bundesrat to vote asunder from
coalition lines in the Bundestag. Thus, Germany makes 12 of 17 eurozone members
necessary to effectuate the expanded EFSF, which enlarges the facilitys total size from
440 billion to 780 billion (and increases Germanys total commitment to 211 billion
from 123 billion). Likewise, it grants the EFSF the power to buy bonds in the secondary
market, support bank recapitalizations and provide short-term liquidity to financial
institutions in need. While five more countries (Slovakia, Malta, the Netherlands, Austria
and Estonia) still need to approve the expansion, most are scheduled to vote within the
next week.

The German and Finnish approvals represent an incremental positive for the eurozone,
which has in recent weeks experienced greater rancor amid heightened tensions over
Greek austerity measures. Likewise, their approvals reflect what weve long held:
European politicians, more than ever, are willing to do what it takes to maintain the
unionat least for the near to mid-term.

Officials in the PIIGS countries (though, theyre not all in the same boat) have also been
doing their part this week. Greek officials stood by fresh austerity measures in the face of
renewed protests in Athens as inspectors from the troika (European Commission, IMF
and ECB) arrived to resume talks to approve Greeces next tranche of aid. In Italy,
officials announced plans to initiate new austerity measures and make strides toward a
more business-friendly nation. For example, Italys finance minster is reported to have
met with bankers and developers Thursday to review the possibility of privatizing various
public assets or extracting more value from them. Documents published by the Finance
Ministry reported the country could raise as much as 40 billion in the short term by
selling state-owned real estate and carbon permits. The report also revealed the average
yield on state-owned real estate has been just 0.1% annually, whereas similar assets in
private hands net nearly 6%. Likewise, interest rates on concessions (think radio
frequencies, etc.) net the government merely 0.5% currently, whereas similar privately
controlled concessions net up to 6.3%. Spain announced its federal budget deficit fell
year-over-year in 2011 through August. (Of course, there are still four months remaining
and the matter of regional government deficits due to Spains decentralized
governmentbut the improvement is notable.)

Theres still much work to be done to right the PIIGS and eurozone. But we believe steps
taken this week by eurozone officials in expanding the EFSF, increasing privatization and
standing by austerity measures are solid moves towards backstopping the euro and
reforming economies where needed.

The Fed announced Operation Twistselling short-term and buying long-term Treasurys, while
maintaining its mortgage-backed securities (MBS) holdings. Their stated aim is to help underpin
October 2011
the economy and keep mortgage rates down. We doubt it does either. What it likely does is
flatten the yield curve a bita minor negative considering long-term rates are already low, and
they cant push them down much from here. As outlined in our 09/22/2011 MarketMinder.com
cover story, Do Little Fed, Do Nothing Government, we believe the Fed should refrain from
such maneuvers and allow the economy to heal with less meddling:

The Feds (not very surprising) announcement it would enact whats come to be called
Operation Twistamounts to selling short-term bonds and buying longer-dated
Treasurys, essentially lengthening the Fed portfolios average maturity and also likely
flattening the yield curve a bit. The Fed also announced it will reinvest interest and
principal payments from its mortgage-backed securities (MBS) holdings back into MBS
instead of Treasurys. The stated reasoning for the new measures is continued economic
sluggishness and a desire to do what it can to maintain low mortgage rates. However, its
language on the economy wasnt new and seemingly didnt reflect worsening economic
conditions.

Flattening the yield curve seems like a dubious goal in an economic environment that
isnt awful but could certainly be stronger. Even the Fed itself considers yield curve
steepness among its leading economic indicators. But the Twist likely isnt a huge
negative considering the Fed has short-term rates pegged at 0%, so they likely cant bring
long-term rates down much from their already low level.

We rarely advocate following politicians' lead, but in this instance, we'd have preferred
the Fed do nothing at all, which is exactly what our dear elected officials in Congress
have (or haven't) been doingnot unusual at this stage with national elections a little
over a year away. Signs of another potential budget debate are already emergingone
that could imminently force a government shutdown! Only this time, the debates not
over raising the debt ceiling (i.e., financing already authorized spending), but over a
continuing budget resolution (i.e., authorizing future spending). Congress hasnt passed a
budget this year (yet againadd that to the do nothing list), so its currently operating
on continuing resolutions to authorize spending.

At this point, it seems unlikely the argument isnt resolved, but stranger things have
happened. In our view, the more politicians bicker over non-issues, the less market-
roiling legislation they can consider. And in that sense, this is an incremental positive.
And this desire to do nothing likely lasts into and during all of 2012.

Positively for stocks, sentiment now seems no longer bifurcated but more solidly dour. Dour
sentiment against a backdrop of better-than-appreciated fundamentals is a strong positive factor
for stocks in our view. Corporate earnings growth remains strong as does revenue growtha
more direct reflection of global demand. Further, as wed expect in the third year of a presidents
term, though politicians cant stop talking, they also havent passed any material legislation. That
likely continues into 2012, a year we either re-elect a Democrat or newly elect a Republican
either outcome historically very bullish.

October 2011
We anticipated 2011 being a frustrating year with considerable choppinessand it has been.
However, anticipating the choppiness and living through it are two separate things, and we
appreciate the difficulty for investors. Our forecast continues to be for a volatile and trying
market that leads to modest returns in 2011, but ultimately drives the bull market in 2012 with
renewed gusto.

We hope youve found this information helpful. Please contact Fisher Investments at 800-568-
5082 for more information on our outlook.

Commentary in this summary constitutes the general views of Fisher Investments 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. Any commentary regarding strategy or
performance reflects our Global Total Return strategy that is benchmarked to the MSCI World Index. Some
clients may have different benchmarks reflecting different objectives and circumstances. Please note that
accounts may not contain all elements of the strategy discussed here. Additionally, individual client
customizations and start dates may preclude certain elements of this strategy from being implemented. The
MSCI World Index measures the performance of selected stocks in 24 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
Thomson Reuters, MSCI World Index net return, from 06/30/2011 to 09/30/2011.

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