The U.S. stock market has rebounded mightily in recent months but Howard Marks cautions investors to brace for a tough slog in the economy, and that’s even if a fresh fiscal stimulus package can be passed by Congress to help heal the coronavirus-stricken business climate.
“Thus, this down-cycle cannot be fully cured merely through the application of economic stimulus,” the co-founder and co-chairman of Oaktree Capital Management, the largest investor in distressed securities worldwide, wrote in a lengthy screed, reflecting on the current state of the economy and the market, published on Tuesday.
“Rather, the root cause has to be repaired, and that means the disease has to be brought under control,” he wrote.
Marks says that even with the illness that has infected more than 37 million people globally, economic stimulus alone isn’t likely to reverse the damage that the U.S., and economies across the globe, face.
” The trauma has been deep, and the impact may not be easily shaken off,” the billionaire investor and co-chairman of Oaktree Capital Management writes.
The prominent investor’s comments come as stocks have been mostly scaling a fresh wall of worry headed into the 2020 U.S. presidential elections and a feared period of rising coronavirus cases, with the Dow Jones Industrial Average
off less than 3% from its Feb. 12 record high, while the Nasdaq Composite Index
and the S&P 500
both stand less than 2% from their all-time highs.
Marks goes on to point out not just problems with a lack of stimulus but the lasting harm of the months-long viral outbreak, which includes the withering revenues of state and municipal budgets weighing on economies at the macro and micro level as cities struggle to fund schools, and pay firefighters and police.
“Police, firefighters and EMTs are no less essential, and the need for health care and family services has only increased,” Marks writes.
To be sure, he notes that further expansive government spending is required to help individuals, businesses and cities emerge from the worst pandemic in at least 100 years, but managing the spread of the illness means that injecting fresh funds to help the economic malaise will prove no immediate panacea.
“The economic recovery everyone’s counting on is not an independent event, unaffected by developments. Rather, it is highly dependent on progress against the disease, as described above, but also on the continuation of fiscal expenditures in the interim,” he adds.
Marks credits the Federal Reserve’s decision to cut its benchmark interest rate to a range of 0% to 0.25% and the signaling of its intention to keep uber-low levels in place for the foreseeable future for providing the most significant stimulus for financial markets in this pandemic era.
That said, investment return expectations, he insists, will be also be hurt by the current state of economy and economic policy over the longer run.
Marks explains the investment return outlook like this:
So the lower the fed funds rate is, the lower bond yields will be, meaning outstanding bonds with higher interest rates will appreciate. And lower yields on bonds means they offer less competition to stocks, so stocks don’t have to be cheap to attract buying. They, too, will appreciate. And if high-quality assets become high-priced and thus offer low prospective returns, then low-quality assets will see buying – implying rising prices and falling prospective returns – because they look cheap relative to high-quality assets.