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Howard Marks isn’t waiting for a bottom as the stock market attempts to recover from a brutal, coronavirus-inspired selloff that hit rock bottom on March 23.
There has been an near-endless debate on Wall Street about when and if stocks will retest that late-March nadir amid the unknowable that is the duration and overall economic impact from the pandemic.
However, at least one thing is known, as far as Marks is concerned. In a recent memo, titled “Calibrating,” he said that the chances are high that the Dow Jones Industrial Average DJIA, -0.11% , which fell as low as 18,974.10 about two weeks ago, the S&P 500 index SPX, -0.16%, which sank to 2,281.64, and the Nasdaq Composite Index COMP, -0.32%, which touched a low of 6,897.84, will slip below those recent nadirs.
Citing monthly research from Gavekal for April, the billionaire investor and co-chairman of Oaktree Capital Management said that history going back to the 1950s suggests that a retest is almost certain:
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…markets rarely clear after one massive decline. In 15 bear markets since 1950, only one did not see the initial major low tested within three months…In all other cases, the bottom has been tested once or twice. Since news-flow in this crisis will likely worsen before it improves, a repeat seems likely. |
That said, Marks — reiterating some of the calls from his past memos in March — said investors need to focus on purchasing assets that they deem to be intrinsically valuable at prices they think translate to discounts based on some metric.
“ ‘So it’s my view that waiting for the bottom is folly. What, then, should be the investor’s criteria? The answer’s simple: if something’s cheap — based on the relationship between price and intrinsic value — you should buy, and if it cheapens further, you should buy more.’ ”
To be sure, it has become decidedly harder for many bulls to suss out value opportunities now, amid markets that have whipsawed over the past several weeks.
The price-to-earnings ratio in the coming year, a popular measure of value, for the S&P 500 was around 16.50, with the five-year average at 16.7, based on FactSet data. And the Shiller PE ratio, popularized by Yale finance professor Robert Shiller, was at 25.10. That represents the lowest level since 2016, but still loftier than the 16.19 mean average.
However, Marks’ point may be less about valuations and more about conviction.
“It’s not easy to buy when the news is terrible, prices are collapsing and it’s impossible to have an idea where the bottom lies,” he wrote. “But doing so should be the investor’s greatest aspiration.”
