Howard Marks believes the 'odds aren't in investors' favor' for the market comeback continuing

Published Fri, Jun 19 20209:11 AM EDT

The meteoric rise off the late-March lows has been more about optimism that the Federal Reserve and Treasury can save the day than it is about fundamentals, investor Howard Marks said in his latest market letter. Looking at current conditions after a nearly 40% S & P 500 burst from March 23, the Oaktree Capital founder noted that "the fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren't in investors' favor." The rally date coincided with a Federal Reserve announcement that it would begin buying corporate bonds in an effort to ensure flow and allow companies in need of financing to access markets. Though the Fed has only recently started the actual purchases , the announcement itself was enough to thaw a frozen market and give rise to a new round of risk taking. That came even amid warnings from high-profile investors including Stanley Druckenmiler and David Tepper about market valuations. In Marks' view, the market "focused on the positives, swallowed them whole, and overlooked the negatives." Among those positives: A Fed that not only would buy corporate debt but also instituted a slew of other lending and liquidity programs that both borrowed from the financial crisis and added some significant new wrinkles. The Treasury added capital to backstop some of the key Fed programs, and Congress already has provided more than $2 trillion in rescue funding and is debating doing more. Despite the ravages of the coronavirus and the continuation of new cases, the market has continued to move in a mostly upward fashion . "It's just my opinion that the imbalance of attention to – and blanket acceptance of – the positives was overdone," Marks wrote. Investors, he added, should be asking themselves a handful of key questions including whether they are weighing positives and negatives "dispassionately" and if the negatives ultimately could prevail; whether the market is "being lifted by rampant optimism"; and how valuations compared to fundamentals stack up historically. His own analysis leads him "to conclude that the powerful rally that we've seen has been built on optimism; has incorporated positive expectations and overlooked potential negatives; and has been driven largely by the Fed's injections of liquidity and the Treasury's stimulus payments, which investors assume will bridge to a fundamental recovery and be free from highly negative second-order consequences." Marks said the market rally "was warranted at some point, but it came surprisingly early and quickly and went incredibly far." "As such, it seems me that the potential for further gains from things turning out better than expected or valuations continuing to expand doesn't fully compensate for the risk of decline from events disappointing or multiples contracting," he added.

Howard Marks, Co-Chairman, Oaktree Capital.

David A. Grogan | CNBC

Looking at current conditions after a nearly 40% S&P 500 burst from March 23, the Oaktree Capital founder noted that "the fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren't in investors' favor."