Perfect score: turn around (sea) and face change

Howard Marks doesn’t put a lot of weight on macro forecasting, but he’s giving us one of his own for years to come. In his view, almost everything that used to work no longer works.

Legendary investment penman (and investor) Howard Marks used his analysis of the “sea change” market he’s experiencing right now to give his recent take on what really matters in managing money. Following the message is more prolific than usual.

Marks’ 53-year investment career has seen two major changes. The first was the start of high yield bond issuance, which heralded a shift in investor risk appetite. “Risk was not necessarily avoided, but rather considered in relation to returns and hopefully wisely borne.” Leveraged his buyouts and modern private his equity industry (indistinguishable to critics).

Marks’ second major turnaround was marked by then-Federal Reserve President Paul Volcker’s success in curbing inflation and ushering in an era of low interest rates. / return thinking ”.

“I believe that the combination of the two has contributed to (a) a resurgence of optimism among investors, (b) the pursuit of profits through aggressive investment vehicles, and (c) the stock market’s astonishing 40 years. I think we created it,” says Marks. writing. “The S&P 500 Index rose from 102 in August 1982 to 4,797 by early 2022, with a compound annual return of 10.3%. What a period! No career luck.”

Marks’ third change is therefore the end of the long-term trends described above, and indeed a “complete reversal” of these trends.

“The progression[of 2022 events]has given way to pessimism for optimism,” Marks wrote. “The market characterized by easy money and bright borrowers and asset owners is gone. Lenders and buyers now had better cards. Credit investors could expect higher returns and better creditor protection. The list of loans and bonds offering yield spreads of 1,000 basis points or more over government bonds has grown from dozens to hundreds.”

Market conditions are ‘strongly different and mostly unfavorable’ compared to those in the immediate aftermath of the global financial crisis. The Fed is in no rush to introduce stimulating monetary policy as it tries to restore confidence. The benchmark rate is likely to remain in the 2-4% range for several years, so the Fed has room to cut rates if it is actually forced to do so, and may even prefer to reduce its role in capital allocation. I have. Active in managing interest rates and holding mortgages.

On the other hand, a recession over the next 12-18 months is “a foregone conclusion among economists and investors,” and that recession could coincide with a deterioration in both corporate earnings and investor sentiment. Marks isn’t the only pessimist, but most investors may face this problem.

“We have moved from a world of low returns in 2009-2021 to a world of full returns, and more may be in the near future,” Marks wrote. “Investors can now get solid returns from credit products, which means they no longer have to rely heavily on risky investments to meet their overall return objectives. Lenders and bargains. Hunter faces a much better outlook than 2009-21 in this changing environment.

“And importantly, given that the environment is very different than it has been in the last 13 years, and most of the last 40 years, the investment strategies that were most effective during that period are likely to perform well in the years to come. It is not something you achieve.”

Marks co-founded Oaktree Capital Management in 1995, following an investment career that dates back to the 1960s.

Lachlan Maddock is a Contributing Editor investor strategy news (Australia)