Investor Howard Marks says stock market valuation is ‘ultra-high’ but not irrationally priced

Published Fri, Jul 30 20212:42 PM EDTUpdated Fri, Jul 30 20213:19 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Investor Howard Marks told CNBC on Friday that he believes the stock market's valuation makes sense due to the interest rate environment and the U.S. economic recovery. "Stock prices are high relative to earnings and relative to history, and we see signs of risky behavior in the marketplace on the part of people who are trying to get a good return in today's low-return world, so there are negatives," the Oaktree Capital co-chairman said on "The Exchange." "But that's not enough reason to take defensive action. There are also positives, and the greatest positive is the strength of the U.S. economy at this time and strength that will probably last for at least another year," he said, adding: "The other thing is a bubble is an irrational lift in the stock market. Today's levels are not irrational. They're ultra-high because interest rates are the lowest they've ever been." Interest rates, Marks noted, are an important component to valuation models that investors use to assess stocks and other assets. With the Federal Reserve maintaining its highly accommodative monetary policy and the benchmark 10-year Treasury yield sitting around 1.234%, Marks said: "The prices of assets are high in the absolute, because the interest rates are so low in the absolute." Marks' comments come as the three major U.S. equity indexes fell , but were still on pace for solid gains in July. The S & P 500 and Dow Jones Industrial Average both touched intraday records Thursday, while the Nasdaq Composite most recently did so Monday. Stocks have rebounded fiercely since their Covid pandemic-era lows in late March 2020, and at various stages in the recovery, some market participants have sounded alarms about elevated valuations and the durability of the rally. The S & P 500 was trading at just over 22 times forward earnings as of Friday afternoon, according to FactSet. That's about where it traded at this time last year. "I think this is not a time to be aggressive, but neither is it, in my opinion, a time to be highly cautious," said Marks, whose periodic memos about markets are closely watched on Wall Street. He co-founded investment firm Oaktree in 1995. Its assets under management stood at $156 billion as of June. Marks said every investor has to judge for themselves how to proceed at this moment in the bull market. "Look at this year. I mean, some people were saying bubble six, nine months ago and if you took your money out and sat on the sidelines, you missed out on 20% gains or something like that," he said. "If you're uncomfortable with your current level of investing, you should reduce it. There's an old saying, 'Sell down to your comfort level,'" Marks added. "There's nothing wrong with taking money out of the market if you want to increase your comfort and as long as your willing to be sidelines and watch other people make money if the market goes up." Disclaimer Watch the interview with investor Howard Marks above.

Howard Marks, co-chairman and co-founder of Oaktree Capital Management

Victor J. Blue | Bloomberg | Getty Images

Investor Howard Marks told CNBC on Friday that he believes the stock market's valuation makes sense due to the interest rate environment and the U.S. economic recovery.