In one of his famous “memos” released on Thursday, Howard Marks (Trades, Portfolio), co-chairman of multibillion-dollar asset management firm Oaktree Capital, discussed the recent market rally as the market continues to overcome the impacts of the Covid-19 pandemic.
The paper, titled “The Anatomy of a Rally,” began with a review of major market milestones over the past several months, starting with the S&P 500’s all-time high reached on Feb. 19 to the low made on March 23, as well as its subsequent rally.
Marks wrote that his purpose in writing was to “take a closer look at the market’s rise and where it leaves us. The goal as usual isn’t to predict the future but rather to put the rally into perspective.”
He then discussed several possible reasons for the market’s remarkable recovery, including monetary and fiscal actions made by the government, a decrease in coronavirus cases and deaths and rising optimism in regard to vaccines, tests and treatments for the virus. Marks also said behavioral factors, including the “fear of missing out,” have played a part as better-than-expected economic reports began to roll out.
“In all these ways, optimistic possibilities were given the benefit of the doubt, making the terms ‘melt-up’ and ‘buying panic’ seem applicable. We saw numerous records smashed in the 11-week recovery of the stock market from its March 23 low,” Marks said. “To sum up and over-simplify, as my partner Bruce Karsh asks in his role as devil’s advocate: can the Fed keep buying debt forever, and can its doing so keep asset prices up forever? In short, many investors appeared to conclude that it could.”
Marks also briefly touched on negative factors that exist in the market, including the risk of a severe second wave of the virus as the U.S. begins to reopen, potential delays in developing a vaccine and the impact of potentially permanent changes to business models in industries like retail and travel.
In conclusion, the renowned investor wrote:
“A bounce from the depressed levels of late March was warranted at some point, but it came surprisingly early and quickly went incredibly far. The S&P 500 closed last night at 3,113, down only 8% from an all-time high struck in trouble-free times. As such, it seems to me that the potential for further gains from things turning out better than expected or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting.
In other words, the fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren’t in investors’ favor.”
Read Marks’ full memo here.
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