Should You WORRY About Recession? | Howard Marks

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01. all asset prices are high there are no very few bargains around there's nobody you know there's no uh forced sellers there's no panic so it's hard to get a bargain yes stock prices are high but the good news is that the econ the economic recovery is young and probably has years to go so i don't worry about a recession uh or the market topping out anytime soon as young student pursuing the financial market stream it's necessary within books and one great reference is mastering the market cycle in this subject what would you say is the market cycle that we are currently in and given the low interest rates what are the investment opportunities first of all you have to realize that what you know i i've been through now 52 years of investing and i've lived through i don't know five six eight ten cycles and you know i've studied the cycles i believe cycles are very important and so forth but the things that happened last year were not cyclical events you have to realize that the the the coronavirus was an exogenous event that means it came from outside and uh you know as a shock and uh very you know the most serious uh health event in the last hundred years and then in order to prevent the spread of the disease or limit the spread the most countries shut down their economies you can't have people going into stores movie theaters restaurants concerts uh etc and hotels and you know they would just pass pass the disease on so they closed all that but of course that brought on a very serious recession the worst recession in history in terms of the second quarter of last year down down a third on an annualized basis in the us um and that wasn't cyclical either that was again that was a man-made uh recession and a man-made closure so the key is of course that the fed and the treasury took very strong action to rescue the economy and uh it was very successful and so uh the market came right back just to give you some perspective the s p 500 was around 3 300 on uh february 19th uh 35 days later on march 24th it was 2200 so it went down by a third in just over a month but then the the fred and treasury took their action march 23rd was the low market went pretty much almost straight up from there uh it closed the year up 18 for the year which means it was about i think was up about 60 from the low and today it's up 100 for the low now your question is where do we stand cyclically this is a great question normally good economic news makes the market go up bad economic news makes the market go down so normally the market and the economy move similarly not exactly the same there are leads and lags and one goes first and the other goes second uh and the leads and legs vary from cycle to cycle but but for the most part the market rises as long as the economic news is good sometimes it declines in anticipation of a slowdown but then when the economic news turns bad then the market turns bad and that goes down so the the the two cycles are related and largely uh um in parallel this time that's not the case this time the market is has been very strong now for a year and a half since march and on september uh 2 3rd it will be a year and a half from below market's been extremely strong as i described all asset prices are high there are no very few bargains around there's nobody you know there's no uh forced sellers there's no panic so it's hard to get a bargain on the other hand the economy is it's in recovery but it's early in its cycle uh you know the last year the third quarter was the best quarter in history also up a third on an annualized basis uh and then the the growth has been good in the first and second quarters of this year up six seven percent uh but it's young so we have uh we have a young economic recovery which we imagine will go on for some more years but we already have a market which is very high that's unusual so now the key is okay those are the facts the key is what is the significance of that you could say enrique uh i'm worried because the economy isn't completely strong and stock prices are already very high so you know i worry but you could also say yes stock prices are high but the good news is that the econ the economic recovery is young and probably has years to go so i don't worry about a recession uh or the market topping out anytime soon and you know my own feeling i mean there are there the market is quite high there are things that are troublesome worrisome in the market uh but i think that as long as the economic news is good uh the market is not gonna uh is not gonna correct um the last thing i'll say about the market and it's not related to cycles is that asset prices are very strongly affected by interest rates because the the you know the the the fed sets what's called the fed funds rate which is kind of like the riskless rate the the base rate for all uh markets and then and then the demanded returns on securities scale from that because everybody says well if i can get x on the market uh on the risk-free rate i i i if i'm going to take some time risk i need 100 basis points if i'm going to take corporate risk i'm going to need 300 base points if i'm going to go to high yield bonds i need 500 basis points and so forth and equities i need you know 700 base whatever it might be so the the riskless rate sets the floor and everything scales up from there but of course the riskless rate is so low that the demanded returns and the a priori returns i don't know if you know that term a priority means uh what we're looking at in the future they're all very very low we have the lowest interest rates in history so in it wouldn't be unfair if we had the highest prices in history and the lowest prospective returns in history so you know i wrote in my last memo that a bubble is is an irrational state and today's prices are not irrational they're rational based on interest rates things are priced fairly relative to interest rates and relative to each other but they're priced high uh and obviously if if if they're priced high because interest rates are low then if interest rates rise that's a source of exposure and you can lose money because if interest rates rise prices will go down probably so this is uh something to think about uh and again you have to figure out whether you think interest rates are going to stay low or not my own guess is interest rates will stay low-ish you know ish means uh uh sort of uh not as low as they are today they'll you know two years from now they'll be higher but i don't think they'll be terribly higher