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Legendary investor Howard Marks warned in his latest note on Tuesday that stock market investors could be setting themselves up for disappointment and losses by falling into “Goldilocks thinking” about the economy.
Marks, the billionaire co-founder of distressed securities giant Oaktree Capital Management, summed up his assessment of the current market consensus in five bullet points.
- Inflation is moving in the right direction and will soon reach the Fed’s goal of about 2%.
- As a result, no further rate hikes will be necessary.
- A further consequence would be a soft landing with either a small recession or no recession at all.
- Therefore, the Fed will be able to lower interest rates.
- This would be good for the economy and the stock market.
“Before I go any further, I want to note that for me, these five bullet points are like ‘Goldilocks thinking’: the economy doesn’t get hot enough to cause inflation to rise; it slows the economy down. “It doesn’t get cold enough to cause this,” Marks said.
Read the entire memo here.
Marks, 77, said it was a fairy tale that had been performed several times during her career, but had rarely been popular for long.
“Usually something doesn’t work as expected, and the economy moves away from perfection. One of the important effects of Goldilocks thinking is that it creates high expectations among investors, thereby reducing potential disappointment ( and losses),” he wrote.
In one graph: Why stock market bulls should be careful about what they want from Fed rate cuts
Stock prices rose strongly towards the end of last year, with the Dow Jones Industrial Average DJIA hitting a record close, while the S&P 500 SPX posted a total return of over 26%, ending the year just 0.5% off its all-time high. finished. Recording ends on January 3, 2022. Stock prices have fallen slightly towards the start of the new year.
The bull market accelerated in 2023 as investors factored in a change in Fed policy to lower interest rates. Interest rate traders are scaling back their expectations for rate cuts in 2024, but federal funds futures still reflect a 53.8% probability that the federal funds rate will decline by more than 150 basis points by December, according to the CME FedWatch tool. ing.
Benchmark 10-year government bond yield BX:TMUBMUSD10Y
Financials for much of the U.S. economy also retreated, inching back to about 4% on Tuesday from a peak of nearly 5% in October.
Mr. Marks has previously described a generational “huge shift” in financial markets as interest rates rise from near-zero levels and investors become less reliant on stocks and riskier investments to meet their overall return goals. “Transformation.”
In a memo Tuesday, Marks said he had no opinion on whether his version of the Goldilocks agreement was correct. But even if that happens, he remains firm in his prediction that interest rates will remain in the 2% to 4% range for the next few years, rather than 0% to 2%.
“My guess is, this is all, the federal funds rate will average 3% to 3.5% over the next 5 to 10 years,” he said. “If you think I’m wrong, ask yourself if you would put your money in another half-point range.”
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