Howard Marks of Oaktree Capital discusses the market’s record highs on CNBC’s “Closing Bell.”
Howard Marks On Market’s Record Highs, Potential Risks
Since its inception in January 2012, the long book of the Voss Value Fund, Voss Capital's flagship offering, has substantially outperformed the market. The long/short equity fund has turned every $1 invested into an estimated $13.37. Over the same time frame, every $1 invested in the S&P 500 has become $3.66. Q1 2021 hedge fund Read More
Well I mean the mere fact of record high shouldn't be a problem. The economy and most corporate profits do better over time so most things should gain over time. I think that on the one hand the economy and the bull market are old. But on the other hand the economy still appears to progress and the valuation of the stock market is not.
Egregious. But it is at levels I guess that led to pullbacks late last year and early last year.
Well that's right. You know look the market can do anything anytime. And it certainly did. Did so in the fourth quarter. I thought the fourth quarter move was overdone and unwarranted. And.
It's not back. When you say not egregious valuations what you mean. Well you know the long term history of the.
P E ratio on the S&P is 15 or 16. We've got up to 18 which is a little high. That got down to 14 which is a little low now it's barely on the high side. But I mean you know you look at ninety two thousand. The PE ratio is 32. That's egregious. 16 or 17 is not egregious.
When you look out there at the moment and you try and work out how much risk to be taking. What are the key factors that you look at.
Well there's a lot as so much to look at. You know there's that there's the length of the recovery and bull market. The how far they've moved the valuation levels the economic outlook the geopolitical factors. And then there's psychology. What kind of psychology is factored into prices. You know the. The relationship of price to fundamentals is determined by psychology. When psychology is too euphoric and too bullish then the price will be too high relative to the fundamentals and vice versa. So we want to know how much euphoria is incorporated in. Security prices.
So what is all that thinking. Tell us about where we are today.
Well today we're a little on the high side. I don't see a lot of euphoria. I don't see. People saying you know this is your last best chance to go to getting the stock market because it's going to the moon. The market has been doing something that when I was starting in this business we used to call climb climbing a wall of worry you know people have people say Oh I know it can't go on forever what could stop it. That's healthy. If people are cautious in their expectations. So I don't think that I don't think that the. Psychology is nuts and it hasn't been really throughout the whole bull market. What's a little challenging is that it's all caused by low interest rates because the ultra low interest rates. Caused people to desert cash Treasuries and money market and high grades and move out the risk curve in pursuit of what they consider acceptable returns something you've been warning about for a long time.
And I'm not going to and I'm not going to tell you I don't see a credit bubble developing. Well I see. Because of. The low.
Returns on safe instruments I see competition to get into aggressive instruments. And when people. Compete to put money out. They do so by being willing to. Receive low prospective returns and high risks. And if that's the case we should know about it and act accordingly.