- While some investors say the stock market is in a bubble due to pop, Howard Marks said the future trajectory of the market is less clear.
- The Oaktree Capital co-founder said in his latest memo that most asset prices are still in a reasonable “gray area.”
- Marks sees too many positives in the economy and market for a “black-or-white” answer to the bubble question.
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Billionaire investor Howard Marks rejected the notion that the stock market is currently in a bubble and said that most asset prices are still justifiable in his latest investor memo.
While other major investors like Jeremy Grantham are calling for the top of the market, Marks said the future trajectory of the market is less clear.
“Over the course of my career, there have been a handful of times when I felt the logic for calling a top (or bottom) was compelling and the probability of success was high. This isn’t one of them,” the Oaktree Capital Management co-founder said.
He continued: “There’s increasing mention of a possible bubble based on concerns about valuations, federal government spending, inflation and interest rates, but I see too many positives for the answer to be black-or-white.”
Some of those positives he sees? A strong US economic recovery up ahead, which will be bolstered by above average-consumer spending driven by pent-up demand, a Federal Reserve that promises to keep interest rates low, and an easing of political uncertainty as narrow majorities in Washington render radical legislation less likely.
But Marks admits the “temperature of the market is elevated,” and says there are signs of euphoria and risky behavior as investors pile into so-called meme stocks, and broaden into riskier assets in a desperate grasp for returns.
One of the prime reasons investors get concerned about bubbles is high asset valuations. While Marks recognizes that stock prices appear high based on historical standards, he said they’re not “crazy.”
At the moment, the S&P 500’s projected price-to-earnings ratio is 22, higher than the average range of 15-16.
“Before making a judgement about today’s valuation of the S&P 500, one must consider (a) the context in terms of interest rates, (b) the shift in its composition in favor of rapidly growing technology companies, with their higher valuations, ( c) the valuations of the index’s individual components, including those tech companies, and (d) the outlook for the economy. With these factors in mind, I don’t think most of today’s asset valuations are crazy,” he added.
Marks also acknowledged that in the longer term, rising interest rates and inflation remain risks.
“Today’s high asset prices may be justified at today’s interest rates, but that’s clearly a source of vulnerability if rates were to rise,” he said.
But the investor ultimately concludes that the prices of most assets are “in a gray area-certainly not low, mostly on the high side of fair, but not so high as to be unreasonable.”
Read Howard Marks’ latest investor memo here.
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