“With another surge in new COVID cases, policymakers will either respond quickly and lock down the economy, or they will not respond quickly and lock down the economy after the situation has worsened,” he wrote in a note. “All in all, in terms of markets and the economy, ‘things couldn’t be better.’ If that’s the case, I’d say it’s time to sell!”
In an interview Guggenheim Partners’ global chief investment officer elaborated, saying that, similar to last year, some areas will close while others remain open. Even if another lockdown isn’t a nationwide mandate, it could dampen risk assets appetite and have a short-term impact on profitability.
“If it weren’t for the fact that we’re in such lofty valuations – whether it’s in areas like stocks or with credit spreads below investment grade bonds – I wouldn’t be nearly as concerned,” he said, noting that August is approaching, a seasonally weak period. “All of the pieces are in place, and it is very possible that the news and unexpected drive in Covid cases will be the catalyst that sets off the summer correction.”
Minerd predicted that the S&P500 would reach 5,000 before the next recession, but cautioned that now might be a good time to de-risk.
“A 10% or 20% correction at this point could be painful,” Minerd said. “But, boy, one thing I want to be clear about is that if I am correct, that 10% to 20% correction will be a fantastic opportunity.”
Is the market overpriced?
“Stock prices are high relative to earnings and history, and we see signs of risky behavior in the marketplace on the part of people 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.”
“However, that is not a sufficient reason to take defensive action. There are also positives, the most significant of which is the strength of the US economy at this time, which will most likely last for at least another year,” he said, adding, “The other thing is a bubble is an irrational rise in the stock market.” Levels today are not irrational. They are extremely high because interest rates are at an all-time low.”
Interest rates, according to Marks, are an important component of valuation models used by investors to evaluate stocks and other assets. With the Federal Reserve maintaining its highly accommodative monetary policy and the benchmark 10-year Treasury yield hovering around 1.234 percent, Marks stated that “asset prices are high in absolute terms because interest rates are so low in absolute terms.”
Marks’ remarks come as the three major U.S. equity indexes fell but remained on track for solid gains in July. The S&P500 and Dow Jones Industrial Average both set intraday highs on Thursday, while the Nasdaq Composite did so on Monday.
Stocks have risen sharply since their Covid pandemic-era lows in late March 2020, and at various points along the way, some market participants have raised concerns about elevated valuations and the rally’s durability.
“I don’t think this is a time to be aggressive, but it also isn’t a time to be extremely cautious,” said Marks, whose market memos are closely followed on Wall Street. In 1995, he co-founded the investment firm Oaktree. As of June, it had $156 billion in assets under management.
According to Marks, every investor must decide for themselves how to proceed at this point in the bull market. “Take a 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% or something like that,” he explained.
“If you are dissatisfied with your current level of investment, you should reduce it. “There is an old adage that says, ‘Sell down to your comfort level,’” Marks added. “There is nothing wrong with withdrawing money from the market if you want to increase your comfort and as long as you are willing to sit on the sidelines and watch others profit if the market rises.”