The U.S. stock market has rallied sharply in recent months, but Howard Marks warns investors to prepare for a tough economic downturn, even if Congress can pass a new stimulus package to cure the coronavirus-hit business climate .
“Therefore, applying economic stimulus alone cannot completely reverse this downward cycle,” wrote the co-founder and co-chair of Oaktree Capital Management, the world’s largest investor in distressed securities, in a long slab of the state of the art in the economy and the market, published Tuesday .
Marks says that even with the disease that has infected more than 37 million people worldwide, economic stimulus alone is unlikely to reverse the damage the US and economies around the world are suffering.
“The trauma has been profound and the effects may not be easy to shake off,” writes the billionaire and co-chair of Oaktree Capital Management.
The prominent investor’s comments come from the fact that stocks with the Dow Jones Industrial Average COMP, especially ahead of the 2020 presidential election and a dreaded time of increasing coronavirus cases, have largely overcome a new wall of worries.
-0,10%
less than 3% from its record high February 12, while the Nasdaq Composite Index COMP,
-0,10%
and the S & P 500 SPX,
-0,63%
both are less than 2% away from their all-time highs.
Marks points to not only lack of incentive issues, but the ongoing damage from the month-long virus outbreak, which includes the dwindling state and local budget revenues that weigh on the economy at both macro and micro levels as cities seek funding fight schools and pay firefighters and police.
“Police, fire and rescue workers are no less important, and the need for health and family services has only increased,” writes Marks.
While he notes that more expansive government spending is needed to help individuals, businesses and cities cope with the worst pandemic in at least 100 years. Dealing with the spread of the disease, however, means that the influx of new resources will prove useful in tackling economic discomfort, not an instant panacea.
“The economic recovery that everyone is relying on is not a stand-alone event that is not influenced by developments. Rather, it depends to a large extent on progress against the disease, as described above, but also on continuing household spending in the meantime, ”he adds.
Marks appreciates the Federal Reserve’s decision to cut its policy rate to a range of 0% to 0.25% and the signal of its intention to maintain extremely low levels for the foreseeable future in order to provide the most significant stimulus to financial markets in this area Pandemic era.
However, he emphasizes that long-term expectations of return on investment will also be affected by the current economic situation and economic policy.
Marks explains the outlook for return on investment this way:
The lower the Fed Funds rate, the lower the bond yields, which means that outstanding bonds with higher interest rates will rise. Lower yields on bonds mean they offer less competition to stocks, so stocks don’t have to be cheap to attract buyers. They will appreciate it too. And when high quality assets become high priced and thus offer low potential returns, poor quality assets are bought – which implies rising prices and decreasing potential returns – because they look cheap compared to high quality assets.
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