Howard Marks' latest memo: The market in 2024 is a roller coaster, ready for the unexpected

Edit | Li Jian

Howard Marks, co-founder of Oaktree Capital, recently released the latest issue of the memo, titled "2023 Year in Review".

In this memorandum, Howard argues that the future is uncertain, especially in the economic and investment sectors. Most experts are not sure what will happen in terms of the economy, interest rates and geopolitics. But this uncertainty is a good thing, because it means that people admit that they don't have an answer.

Despite believing the future is unpredictable, Max believes inflation is likely to slow and interest rates will fall. However, he advises caution and not to rely on any predictions for the future.

Here's a great excerpt from the memo:

In my experience, there are two kinds of investment environments: people feel like they know what's going to happen, and they don't know what's going to happen.

Given my skepticism about the ability to foresee the macro future, I think most of the time, when people say they don't know what's coming, they're probably right. Surprises in macro developments and market behavior are more common than expected realizations.

As a good example, recall the fall of 2016. Most experts are very confident in two things: Hillary Clinton will win the US presidential election, but if Donald Trump wins by some fateful coincidence, the US stock market will collapse.

Instead, Donald Trump won, and the S&P 500 soared over the next 14 months, rising nearly 30%. I often cite this as evidence that (a) we don't know what's going to happen, and (b) we don't know how the market reacts to what happens.

Most of the people I spoke to today told me that they were unusually uncertain about the future of the economy, central bank behavior, fiscal management (or lack thereof), politics and geopolitics, and what it all means for markets. They admit that their uncertainty is very healthy.

Indeed, the outlook is as unpredictable as ever. Economic data is mixed, so the impact on inflation can only be described as mixed. Inflation – and the Fed's actions – is clearly the market's protagonist.

There is a consensus that there will be six rate cuts this year, and by the end of the year, the federal funds rate will be around 4%, and the stock market rally has slowed.

Still, inflation does seem to be slowing, so interest rates are likely to fall from current restrictive levels.

The economy has been doing well – especially compared to the rest of the world – and there has been no derailment or overheating to the point where the Fed needs to tighten policy. Of course, I've always cautioned Oaktree Capital to never bet on my macro view, and neither should you.

Here's an interesting question: where are we in the economic cycle?

How you answer this question depends largely on how you look at 2020. Economic data in the second quarter of 2020 showed a recession, but it was very short-lived, as GDP returned to growth in the third quarter. If you look at 2020 as the first year of a recession, the recovery has only been around for more than three years, and we're still in the early stages of an upcycle, given that the economy hasn't overheated significantly.

But if you think that 2020 is not a recession, it means that we are already in the 14th year of economic recovery (starting in 2010). In this context, the economy has gone through a long period of growth.

My view is that 2020 was an abnormal time, with many non-economic factors playing a decisive role. I wrote in my book "Cycles" that cycles are the result of excesses and corrections. But the 2020 "recession" did not stem from previous excesses, but from a number of other exogenous factors: (a) the pandemic, (b) the decoupling of the global economy, (c) the massive payment of relief, and (d) the protracted struggle of supply chains to cope with the needs of recovery.

For these reasons, I believe that we cannot define those years in commonly used economic terms, that is, we cannot define 2020 and 2021 in terms of cycles.

Most believe that the U.S. stock market is a bit too high at the moment, with the S&P 500 trading at a forward-looking price-to-earnings ratio of more than 20 times, compared to its long-term average of about 16 times.

Here's a paradox: If most people really feel that the market is too high, wouldn't they sell stocks and let the market pull back?

However, the high P/E ratio is mainly due to the pull of the "Big Seven" skyrocketing, so I think the P/E ratio of more than 20 times is "high", not "crazy".

Today's high interest rates for commercial real estate, especially office buildings in large cities, mean that the market value of most properties is much lower. However, there wasn't a lot of trading volume last year, so there wasn't much "price discovery" either. So, is the problem being solved, or is it frozen for the time being? The only thing I know for sure is that it's still an unknown whether people will be able to return to work smoothly, and therefore the long-term demand for office space.

The problem with regional banks and community banks is that real estate loans are disproportionately overrepresented, but I think the problems of banks will ultimately prove to be isolated rather than systemic.

In summary, overvalued stocks can put pressure on the market. But I don't think the market is in an extreme environment yet. There is a good chance of a sharp decline in the near future, but it cannot be said that these circumstances require us to significantly increase our defensiveness.

Of course, I've been suggesting an increase in credit allocation last year, which is also inherently a defensive measure.

Now is a good time for me to warn that the Fed's manipulation of individual interest rates is an example of a short-term event that lacks long-term significance. At the moment, everyone wants to know how many rate cuts there will be in 2024, starting in what month. However, as I wrote in my November 2022 memo, the details of the rate cut are pointless, as any impact could disappear within a few months.

The question is whether interest rates will remain in the 3.0%-3.5% range for the next 5-10 years, or will they return to the 0%-2% range that they were between 2009 and most of 2021? I can only say so much, but it's already a lot.

(The article only represents the author's personal views and does not represent the position of this journal.) ）