Howard Marks, Chairman at Oaktree Capital Management, was interviewed on CNBC on Tuesday, and discussed the current condition of the stock market. In addition, he talked about when the U.S. equities may face a “day of reckoning.”
“Nobody can expect something to work forever –Mr. Marks assures- and what happens usually is that the better something does the more people expect from it. Well, if something does really well, that borrows from the future, and they shouldn’t expect it to go on forever” (CNBC). There is always a “day of reckoning,” which arrive when things reach excess, he explains. “The only question is where and from what level.”
Are we there yet?
According to Mr. Marks, most areas are not at “excessive levels, at bubble levels” at the time. To explain this statement, he looks back at the year 2000, when “the bad” decade for the stock market really began. At the time, the S&P P/E ratio was 32x; nowadays, it is roughly half that figure (16x or 17x), in line with the postwar averages.
“You can argue that it is higher that they should be, because the growth outlook is not what it used to be. But still, 16 or 17 P/E ratio on the S&P is a far cry from 32. I would say that the prices of many assets today, I would describe as being on the high side of fair, but not excessive.”
Is multiple expansion possible?
Although Mr. Marks is not a “raving bull on the economic outlook for the United States,” he does believe that there’s a chance for the U.S. economy to ameliorate. Amongst the most important catalysts, he mentioned the Shale (development in energy independence), “lower costs, increased strength in manufacturing, 401(k) and home appreciation making people feel wealthy, and spending more money, it could become self-feeding in a positive way.” He highlights, however, that this is not a forecast, but rather a possibility that the economy does better than him and others expect. “But (…) expectations are modest, which means that there is room for surprise on the upside.”
Howard Marks co-founded Oaktree Capital Management in 1995, along with a group of people that worked with him at TCW Group. As you might figure, before taking the lead at Oaktree in 1995, Howard Marks worked -for ten years- at the TCW Group, overseeing distressed debt, high yield bonds and convertible securities investments.
Oaktree is a Los Angeles based investment firm that specializes in alternative investments and maintains an emphasis on distressed debt, corporate debt and convertible securities. The company manages roughly $86.2 billion in investment capital for various pension funds, foundations and endowments. The primary focus of the firm is on companies that are less known by major investors and other funds, and are generally considered contrarian investments.
Watch the full interview below: