- Howard Marks, the billionaire founder of hedge fund Oaktree Capital, says that investors are taking on uncharacteristic levels of risk as returns dry up.
- He says traders are also being driven by a fear of missing out, which he calls "one of the more powerful reasons for investor aggressiveness, and also one of the most dangerous."
Howard Marks thinks investors are being pushed to extreme means to make money in this market.
In his year-end 2017 memo, the billionaire founder of hedge fund Oaktree Capital lamented the lack of potential returns across a wide range of asset classes, which he says has traders behaving in uncharacteristic fashion.
"The need of investors to wring out good returns in this 'low-return world' is causing them to engage in what I call pro-risk behavior," he wrote. "They're paying high prices for assets and accepting risky and poorly structured propositions. In such a climate, it's hard for 'prudent' investors to insist on traditional levels of safety."
Marks also points out that traders are also being driven by a fear of missing out, which he calls "one of the more powerful reasons for investor aggressiveness, and also one of the most dangerous."
He questions the true health of a market that's being driven higher by investors thinking not about fundamentals or stretched valuations, but instead about how upset they'll be if they miss another leg up. And he finds the situation potentially untenable.
"Market behavior implies a level of equanimity on investors' part that could prove unrealistic, and thus subject to reversal," he said. "I'm convinced the easy money has been made."
So how did we get to this point? Marks attributes the lack of market opportunities to valuations that are stretched across the board. He specifically refers to the stock market price-to-sales ratio, bond yields, private equity transaction multiples, real estate capitalization ratios, a CBOE Volatility Index (VIX) stuck near record lows, and the so-called "Buffett Indicator," which is the ratio of equity market cap to GDP.
The VIX, also known as the stock market's fear gauge, has been stuck near record lows for much of the past year, reflecting investor complacency.
But it's not all doom and gloom for Marks, who's cautious but not outright bearish when it comes to equities. He acknowledges that the market still has plenty going for it, particularly a rare period of sychronized global growth.
Marks also notes that President Donald Trump's pro-business and deregulatory agenda will prove a positive catalyst for stocks. He says it's "led to a rise in optimism, confidence and 'animal spirits' among corporate executives, things that have great potential to be self-reinforcing."
In the end, Marks admits there's no definitive answer for what the future of the market holds - no big, sweeping statement that encapsulates the situation. As such, he finds himself somewhere in the middle of the risk spectrum, leaning more towards the defensive end.
"Some people are excited about the fundamentals, and others are wary of asset prices," said Marks. "Both positions have merit, but as is often the case, the hard part is figuring out which one to weight more heavily."