Billionaire investor Howard Marks, co-founder of Oaktree Capital Management, can’t quite wrap his head around the optimism in the market right now.
New cases of the coronavirus seem to be slowing, the economy is still shut down. Meanwhile, 22 million Americans have lost their jobs in the last month. Additionally, corporate earnings are expected to drop to their lowest levels since 2009.
Despite that, stocks have rallied almost 30% since the lows of March 23.
“We’re only down 15% from the all-time high of Feb. 19… it seems to me the world is more than 15% screwed up.” Marks said yesterday during an appearance on CNBC.
He added that these rallies are a common occurrence during a bear market. He also mentioned that the rallies are typically followed by the market falling to new lows.
Is There Room For Optimism in the Market?
In a recent note, he pointed to work done by Gavekal Research that looked at previous bear markets and shows that a retest of the lows is almost certain.
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“Markets rarely clear after one massive decline. In 15 bear markets since 1950, only one did not see the initial major low tested within three months… in all other cases, the bottom has been tested once or twice. Since news-flow in this crisis will likely worsen before it improves, a repeat seems likely.”
He also mentions research by his son Andrew that shows during the two most recent crises, stocks rallied before ultimately collapsing a second time.
During 2001, stocks initially fell 27% before rallying 19%. This rally was followed by a second decline of 26%, then a rally of 22%. Stock ultimately fell another 33% before the bear market was over and the next bull market started.
The same pattern repeated during the Great Recession, when stocks initially fell 18% before rallying 12%. We then saw the massive 47% decline we all remember. It was followed by a 25% rally and then the final decline of 27% before the bull market started.
In addition to Marks’ doubts about the market rally, the pace of this rebound in particular has confounded Marks.
“It took seven years to get back to the 2000 highs in 2007,” Marks said. “It took 5½ years to get back to the 2007 highs in late 2012. So, is it really appropriate that, given all the bad news in the world today, we should get back to the highs in only three months? That seems inappropriately positive.”
Light at the End of the Tunnel?
The rally has mostly been built on positive news around the spread of the coronavirus slowing and the development of a vaccine. This is along with the possibility of reopening the country’s economy in the near future.
New York has been the hardest-hit state, and on Sunday Gov. Andrew Cuomo said his state is “past the high point” of new cases, noting the infection rate has fallen along with coronavirus-related hospitalizations.
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Stephen Jen, co-founder of SLJ Macro Partners, wrote in a client note “The equity markets and bond markets in the US are telling me that my relatively optimistic outlook for the global economy is also what the markets are starting to price in. There is now light at the end of the tunnel.”
That’s the type of optimism that befuddles Marks.
“People are traumatized, and not just because of the performance of their stocks,” he added. “Everybody’s life is hugely changed.”