Oaktree Capital leader Howard Marks (Trades, Portfolio) has lived through many different types of market turbulence, so he was probably not too shocked by the selloff that hit securities markets in March. However, I would wager that even he may have been a little surprised at how quickly asset prices have recovered from that shock - the S&P 500 is back to within 7% of its all-time high and the Nasdaq actually hit a new all-time high on June 8. In a recent interview with the Alpha Exchange podcast, Marks gave his explanation for why he believes this has happened.
The market is not a crystal ball
Marks doesn’t subscribe to the theory the market is some kind of crystal ball that can forecast the future. What he does believe is that it is possible to analyze market behavior to determine what kind of thinking is currently en vogue among market participants:
“I’m not one who takes messages from the market in terms of telling me what lies ahead...I don’t think the market knows what’s going to happen, I think prices tell me what people think is going to happen, and when I think they’re wrong I’m happy to bet against them.”
He went on to say that he doesn’t think it’s possible for gross domestic product to return to 2019 levels until at least late 2021. In other words, while stocks have largely recovered from their March lows, there is little reason to think the underlying fundamental strength that justified those valuations has returned. So why is the stock market so close to its all-time highs?
Bull are betting big on Federal Reserve support
Marks believes the level of the stock market today is reflective of the fact that investors think the Federal Reserve will be willing - and able - to support asset prices against further declines. Now, of course, this is not the Fed’s actual mandate, but what’s important is that investors believe that the Fed will act in ways that will boost stock prices. Is this bullishness turns out to be wrong, he said:
“The things that have directly benefited from the Fed’s actions have recovered, and the things that have not directly benefited from the Fed’s actions have not recovered. So, for example, public securities have recovered, whereas real estate, which has been negatively affected by closures and non-payment of rent, probably has not recovered. And in the long run, to have an environment in which securities do well, you probably have to have an environment in which real estate does ok. So the big divergence between those two is probably not appropriate.”
The single most important characteristic of the post-2008 era has been massive market intervention by central banks. Any time markets began to wobble, monetary authorities unleashed some new policy: be it lowering interest rates, quantitative easing, intervention in the repo markets or corporate bond purchases. Bulls are betting that it will work again this time around. We’ll have to wait and see if they’re right.
Read more here:
- Jim Chanos: The Problem With the Gig Economy Business Model
- Carl Icahn: How Companies Use Buybacks to Increase Stock Price
- The US Federal Reserve Turns to Buying Individual Bonds
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