'There's much more to the story': Billionaire investor Howard Marks blasts the market's 'elementary take' on the Fed's latest behavior - and sets the record straight
- Howard Marks, the cofounder and cochairman of Oaktree Capital Management - which oversees $119 billion - wants investors to look deeper when assessing the Federal Reserve latest actions.
- Marks thinks the market should focus more on one question in particular: "Why is the Fed cutting rates?" in order to develop a coherent outlook going forward.
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It's easy to accept financial markets at face value.
Omnipresent talking heads, deluges of data, and outlandish market calls make it easy to accept prevailing narratives. And, unfortunately, that often reinforces oversimplified takes on what drives markets.
One such example would be how the market views the Federal Reserve. Conventional wisdom suggests that monetary easing efforts such as interest-rate cuts leads to stock-market gains. To the contrary, if the central bank restricts the monetary supply, that would seem to be negative for equities.
But what if it's not that simple?
Howard Marks - the cofounder and cochairman of the $119 billion Oaktree Capital Management - thinks the situation possesses far more nuance than many investors realize. And he's here to set the record straight.
"Recent market reaction suggests investors are following their usual elementary take: weak economy → rate cuts → economic stimulus → stronger GDP → higher corporate profits → higher stock prices," Marks wrote in a recent memo.
In order to challenge this idea, Marks asks one straightforward question: Why is the Fed cutting rates?
"The answer, of course, is that the Fed anticipates economic weakness (or sees it taking place) and wants to ward it off," he said. "So the second-level thinker wonders how bad the outlook is, how much worse it might have gotten without the rate cut, and whether the cut will be sufficient to avert a slowdown."
To Marks, the market is missing the bigger picture. They're blindly in love with the idea of lower rates, but not properly assessing the underlying economic weakness. He says this is a big mistake.
He uses a historical anecdote from the Great Recession to bolster his view - one built around the fact that the Fed initially cut interest rates by 50 basis points to try to mitigate the economic downturn in 2007.
"It's worth noting that 18 months after that first rate cut in September 2007 - during which time ten more cuts followed, eventually taking the fed funds rate to nearly zero - the S&P 500 finally bottomed out, down more than 50% from where it stood on the day of the first cut," Marks said.
In short, investors would have lost half of their capital if they piled into stocks after the first Fed cut in 2007.
For these reasons, Marks thinks investors' bullish knee-jerk reaction to lower rates in the US economy is paradoxical given historical precedent - and a classic example of not being able to see the forest for the trees.
The investing legend's stark assessment paints a picture where investors are potentially setting themselves up for disaster. And they'll only have their face-value, first-level analysis to blame.