Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 364

Howard Marks' anatomy of an unexpected rally

Throughout the COVID-19 pandemic, we have checked the latest memos to clients written by Howard Marks, Co-Chairman of multibillion-dollar asset manager, Oaktree Capital.

Marks recalls the recovery from the 23 March low resulted in the biggest three-day gain in more than 80 years, which built into a rise of 45% by 8 June. In fact, after Marks' note was published, Wall Street closed its best quarter since 1987, so it is timely to review his anatomy of a rally.

How can the market recover when the economy is much worse than before?

Prior to the pandemic, says Marks, an all-time high had been achieved when the economy was strong and the outlook good. Yet the market has recovered close to that level when economic conditions are much worse. He lists the reasons for the optimism as:

  • Investor confidence in the Fed and Treasury to bring about an economic recovery by doing 'whatever it takes'.
  • Some improvements in the number of COVID-19 cases and deaths, especially no shortages of hospital beds and optimism on vaccines and treatments.
  • The market’s ability to look beyond the crisis, supported by improving economic statistics, to a recovery in GDP and corporate earnings in 2021.

Investors became convinced that the Fed would ensure markets continued to rise, with seemingly little concern for debt levels. The Fed did not even require strong creditworthiness in corporate bonds purchased. With ultra-low rates, the discounted present value of future cash flows rises. Low returns start to look relatively attractive, argues Marks.

He has been asking his team: can the Fed keep buying debt forever?

When bullish market moves began in late March, investors who have little regard for value, such as index funds, ETFs and other automatic traders, perpetuated whatever is set motion. Then behaviours such as FOMO replace the previous greed. He adds his voice to the impact of new retail investors:

“Retail investors are said to have contributed substantially to the stock market’s rise, and certainly to its most irrational aspects … large numbers of call options have been bought in recent days, and it was reported that small investors accounted for much of the volume. Developments like these suggest the influence of speculative fever and the absence of careful analysis. There’s a widely held theory that government benefit checks have been behind some of the retail investors’ purchases. And that makes sense: in the last three months, there’ve been no games for sports bettors to wager on, and the stock market was the only casino that was open.”

He acknowledges his usual cautious approach generates many opposites to the points made above (as described in his previous memos), but it depends what weight the markets gives to each at a point in time.

How to make sense of what is happening

Marks says it is futile to expect the stock market to operate with a universally accepted and reliable way to value companies without bouts of optimism or pessimism. The market can swing quickly between ‘flawless’ and ‘hopeless’.

“But the most optimistic psychology is always applied when things are thought to be going well, compounding and exaggerating the positives, and the most depressed psychology is applied when things are going poorly, compounding the negatives. This guarantees that extreme highs and lows will always be the eventual result in cycles, not the exception.”

He appeals to a few time-honoured standards in the three stages of a rally:

  • the first stage, when only a few unusually perceptive people believe improvement is possible
  • the second stage, when most investors realise that improvement is actually taking place, and
  • the third stage, when everyone concludes everything will get better forever.

Around 23 March was the first stage, when few people focussed on economic improvement. Stage two happened quickly and we went straight to stage three. It feels to him that the market is too focused on the positives.

“I had good company in being sceptical of the May/June gains. On May 12, with the S&P 500 up a startling 28% from the March 23 low, Stan Druckenmiller, one of the greatest investors of all time, said, 'The risk-reward for equity is maybe as bad as I’ve seen in my career.' The next day, David Tepper, another investing great, said it was 'maybe the second-most overvalued stock market I’ve ever seen. I would say ’99 was more overvalued.'"

And after these two spoke, the market continued to run. So his bottom line is similar to his last few memos, that investors are not compensated for risk:

“the fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren’t in investors’ favour.”

 

Footnote (not from the Marks article). This chart from JP Morgan shows the rapid growth of major central bank balance sheets as they print money, and how their bond purchases have pushed down global bond rates.

 

Graham Hand is Managing Editor of Firstlinks. Howard Marks is Co-Chairman of multibillion-dollar asset manager, Oaktree Capital, and here is the full text of his latest memo. This article is general information and does not consider the circumstances of any investor.

 

  •   30 June 2020
  • 5
  •      
  •   
5 Comments
Gary M
July 01, 2020

And NASDAQ hits an all-time high. One thing that is missed is we should no longer think about the market as one beast. It has massive winners and losers from the pandemic, and the Amazons, Apples and Googles of the world go from strength to strength. They need to be analysed in a different context.

Steve
July 04, 2020

Could the Amazons, Apples and Googles of the world form part of the next Nifty-Fifty experience?

KP
July 01, 2020

I have been in the market since 1963 and have seen nothing like what has happened over the last 3 odd months. I realise the market normally looks approximately 9 months ahead. Do people think that in around 9 - 12 months things will be back to normal ??? Just stop and give it some real thought. I have been a follower of Howard Marks for many years as also WarrenBuffet / Charlie Munger etc i dont see them rushing into the market at the moment. Only time (and it could be a while) will tell. As a friend of mine says " keep your powder dry ".

George
July 01, 2020

If Howard and all his expert mates don't know, what hope the rest of us? Someone out there is enjoying this market.

Chris
July 05, 2020

Meanwhile, Afterpay hits $18b (yes, "b", as in 'billion') in Market cap, being the 19th largest company in the ASX, eclipsing ASX, COH, RHC, SHL, REA etc., whilst making no profit, having negative cashflow, forever raising capital and having negative return on equity.

Feels like the Gordon Gekko scene in Wall Street 2 where he says "is everyone else out there nuts ?"

 

Leave a Comment:

banner

Most viewed in recent weeks

Australia's retirement system works brilliantly for some - but not all

The superannuation system has succeeded brilliantly at what it was designed to do: accumulate wealth during working lives. The next challenge is meeting members’ diverse needs in retirement. 

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

The 3 biggest residential property myths

I am a professional real estate investor who hears a lot of opinions rather than facts from so-called experts on the topic of property. Here are the largest myths when it comes to Australia’s biggest asset class.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

AFIC on the speculative ASX boom, opportunities, and LIC discounts

In an interview with Firstlinks, CEO Mark Freeman discusses how speculative ASX stocks have crushed blue chips this year, companies he likes now, and why he’s confident AFIC’s NTA discount will close.

Property versus shares - a practical guide for investors

I’ve been comparing property and shares for decades and while both have their place, the differences are stark. When tax, costs, and liquidity are weighed, property looks less compelling than its reputation suggests.

Latest Updates

Superannuation

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Investment strategies

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

Infrastructure

How many hospitals will an extra 1 million people need?

We're about to add another million people to cities like Brisbane, Sydney, and Melbourne. How many hospitals and other essential infrastructure are needed to cater to a million more people? This breaks down the numbers.

Risk management

Is the world's safest currency actually the riskiest?

The US dollar’s long-standing role as a ‘shock absorber’ during times of market stress is showing cracks. The ‘Liberation Day’ sell-off was a timely reminder of this, and here's what investors should do about it.

10 things I learned about dementia and care homes from close range

My mother developed dementia before eventually dying in June last year. She was in three aged care homes before finding the right one. Here is what I learned along the way.

Economics

China's EV and solar backlog and future trade wars

China has flooded the world with electric cars and solar panels to offset the economic drag from a weak domestic property market. How long can this go on, and what are the implications for commodities and Australia?

Investment strategies

Why Elon Musk's pay packet is justified

Tesla copped criticism after its shareholders approved a package allowing Musk to earn up to $1 trillion in stock options. If only Australian businesses were more like Tesla.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.