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	Fisher Investments Offers Investors Insights on the Stock Market's Next Moves Rising interest rates and oil prices won't dent the Stock Market, according to a new research report published by Fisher Investments. Here's why the firm sees sunny days ahead for investors.

Executive Summary

To date, 2005 reminds us of a summer morning fog. The year commenced with a thick, dark, dismal, and growing cloud of risk aversion that suppressed stock prices. However, like the brightly-burning summer sun above it all that inevitably burns through, strong fundamentals have begun to overwhelm earlier-perceived risk factors. Global equity indexes subsequently recovered some ground lost in the first quarter. We believe this trend will extend to significant gains in the back half of 2005.

Economic and corporate conditions continue to shine. We see virtually all pistons of the growth engine we described at the beginning of the year firing strongly. The US dollar has been resurgent, as we expected. Aggregate corporate earnings have materially exceeded expectations, and analysts are consistently revising estimates upward. Corporate balance sheets, already in excellent health, keep improving at breakneck pace and regulatory conditions have shown signs of becoming more favorable. Simultaneously, long-term bond yields have fallen around the world. This has increased the degree to which stocks are undervalued relative to fixed income in our view. We find that corporations are capitalizing on these favorable conditions by harnessing healthy cash flow and low borrowing costs to make massive share repurchases and execute value-enhancing mergers and acquisitions.

Some of the risk aversion "fog" can be attributed to a number of well-publicized storylines we think are either misguided or already reflected in prices. Expensive oil, rising short-term interest rates, inflation, real estate "bubbles" and terrorism all weigh on the collective investor psyche. Detailed explanations of why we are not especially concerned about these topics can be found in the pages that follow.

Several other contributors to risk aversion warrant closer attention. Perhaps the most ominous developments in the first half of the year stemmed from legislative risk. In the weeks the President stumped for Social Security reform, the stock market dropped. Similarly, when a protectionist-inspired bill threatening huge tariffs on goods imported from China advanced through the Senate, markets reeled. However, we feel confident the former will not be a real issue until at least 2007, and the latter will never become law. The Supreme Court's ruling expanding powers associated with eminent domain coincided with another drop in stock prices late in the quarter. While it is not likely to impact private property rights overnight, it may have some real, negative longer-term impacts worth watching. Another potentially meaningful risk factor is the uncertain identity of the next Federal Reserve chairman.

Despite these various risks, we view a bear market scenario as very unlikely in the next six months. Strong fundamentals and cheap equity valuations should overpower the uncertainty these factors contribute.

This bull market has yet to experience a correction (a decline of 10% or more). The sluggish start to the year might mean we will not see one for a few more quarters. However, we expect volatility to increase relative to the unusually tame levels of the last 18 months.

As the second half of 2005 gets underway, we expect sunshine to burn away the fog, leading to a beautiful day and equity appreciation across the globe. We encourage investors to see beyond mainstream negativity and look forward to the realization of justified higher equity valuations ahead.