Oaktree’s Marks Says Stocks Are in Early Days of a Bubble (full interview)

Summary

In this interview, Howard discusses the current state of the market, expressing concern over high stock valuations despite a long period without a market correction. He highlights how optimism and psychological fluctuations can drive bubbles, with echoes of the late '90s tech boom. While he acknowledges the strength of companies like the 'Magnificent Seven,' he cautions about the broader market being overvalued. Howard suggests focusing on more defensive investment strategies like credit rather than equities and points out that the U.S. remains a strong investment destination, though potentially less exceptional than before.

Takeaways

• 😀 Stock prices are high, but market corrections have been rare for the past 16 years, leading to a distorted sense of normalcy in valuations.
• 😀 The biggest mistake investors make is assuming current conditions will always persist, ignoring the likelihood of a market reversion to the mean.
• 😀 Investor optimism is a driving force behind current market behavior, which often leads to bubbles as enthusiasm grows disproportionately.
• 😀 The current market environment reminds Howard of the late 1990s, particularly the tech boom, where irrational optimism about tech stocks led to a market rally.
• 😀 While tech stocks are expensive, Howard doesn't view them as the primary concern; it's the high valuations of more average companies that are more alarming.
• 😀 Despite high valuations in tech stocks, the market as a whole is experiencing excessive valuations, which raises concerns about long-term sustainability.
• 😀 Howard's advice is to be cautious and defensive, suggesting a shift from equities to credit investments, which offer more predictable returns and less risk.
• 😀 Credit, unlike equities, offers a promised return, making it a safer option during times of high equity valuations, even with tighter credit spreads.
• 😀 While credit spreads are at their tightest since 1998, the probability of credit investments providing stable returns is still high compared to equities.
• 😀 The US remains an attractive investment destination, but its exceptional status may be diminishing slightly compared to other regions, which might offer cheaper alternatives.
• 😀 International markets, although not as dynamic or innovative as the US, may offer attractive opportunities due to their lower valuations relative to the US market.

Q & A

Why does Howard believe that asset prices are strong despite what he views as net negative developments?

Howard attributes the strength in asset prices to the absence of a serious market correction in the past 16 years. Investors have grown out of the habit of considering market corrections, and this has led to overly optimistic market behavior, which can lead to bubbles.

What is Howard’s biggest concern regarding investor behavior?

Howard's biggest concern is that investors assume current conditions will always persist, which leads them to overlook the likelihood of market reversion to the mean. He believes investors often become overly optimistic and fail to prepare for corrections.

What historical event does Howard compare the current market to?

Howard compares the current market to the late 1990s, particularly the period around 1997, when investors were overly optimistic about tech stocks. Despite Alan Greenspan’s warning about 'irrational exuberance,' the market continued to rise for a few years, suggesting the current market may not yet be at a 'critical' point.

Why does Howard not view tech stocks as the main concern this time around?

While tech stocks like the 'magnificent seven' (e.g., Amazon and Alphabet) are highly valued, Howard doesn’t see them as the primary concern. His worry is that high valuations are being applied to more average companies, which could be more problematic than exceptional valuations for exceptional companies.

What does Howard mean by 'reversion to the mean'?

Reversion to the mean refers to the tendency of market prices to return to their historical average over time. Howard believes that the current market, which is highly valued, will likely experience a correction as prices revert to more reasonable levels.

Why does Howard prefer investing in credit rather than equities in the current market?

Howard prefers credit investments over equities due to their defensive nature. Credit provides a contractual promise of payment and a predictable return, which he believes is safer compared to investing in stocks, where valuations are high and returns are uncertain.

Are credit markets currently offering good defensive opportunities, given the tight credit spreads?

While credit spreads are the tightest since 1998, Howard argues that debt investments still provide a more reliable, defensive option than equities. Despite lower spreads, debt investments offer a more predictable return, with the potential for a 6-7% return over the next decade, making them less risky than stocks at elevated valuations.

How does Howard view the US as an investment environment compared to other regions?

Howard still considers the US to be the best place to invest, citing its spirit of innovation, strong capital markets, and rule of law. However, he acknowledges that the US may no longer be as exceptional as it once was, with some other regions offering opportunities at lower valuations.

What does Howard mean by 'talking your own book' when discussing investments?

‘Talking your own book’ refers to the practice of advocating for investments that align with your own holdings or interests. Howard acknowledges this bias but stresses that investing in credit is a more defensive strategy given current market conditions.

What role does psychological behavior play in market fluctuations, according to Howard?

Howard believes that market fluctuations are largely driven by psychological factors. Investors often swing between neutrality, optimism, and extreme optimism, which can create bubbles. This psychological cycle contributes to the overvaluation of assets and can lead to market corrections.