By Stock-market investors may be setting themselves up for disappointment — and losses — by engaging in what legendary investor Howard Marks calls “Goldilocks thinking.” In his latest memo, Marks, the co-founder of Oaktree Capital Management, offers a cautionary tale for those who believe the economy will continue to thrive without any hiccups. Let’s take a closer look at his assessment:
Goldilocks Thinking: The Five Bullet Points
Marks summarizes the prevailing market consensus with five key points:
- Inflation is on track to reach the Federal Reserve’s target of 2%.
- Consequently, additional rate increases won’t be necessary.
- This will result in a soft landing for the economy, marked by a minor recession or none at all.
- As a result, the Fed will be able to bring rates back down.
- Ultimately, this will bode well for both the economy and the stock market.
However, Marks warns against falling into the trap of “Goldilocks thinking,” where everything is just right. He cautions that this mindset often leads to unmet expectations and potential losses.
The Reality of Goldilocks Thinking
According to Marks, his experience over the years has shown that the economy rarely remains in a state of perfection. Something usually goes awry, and the economy deviates from the expected path. This deviation can create high expectations among investors and set the stage for potential disappointment and financial setbacks.
Proceed with Caution
In conclusion, Marks urges stock-market investors to approach the current situation with caution. While Goldilocks thinking may seem appealing, it carries its own set of risks. It’s essential to acknowledge that economic conditions can change unexpectedly, potentially leading to unfavorable outcomes.
For a more detailed analysis of Marks’ insights, you can access the full memo here.
Remember, in the stock market, it’s crucial to be prepared for various scenarios and not rely solely on fairy-tale beliefs. Stay informed and adaptable to ensure the best possible outcome.
In One Chart: Stock-Market Bulls Beware
To further underscore the need for caution, take a look at the informative chart below on why stock-market bulls should be careful what they wish for regarding Fed rate cuts:
As this chart illustrates, it’s vital to approach market expectations with care and be mindful of potential risks associated with rate adjustments.
Remember, investing requires a balanced perspective and an understanding that reality doesn’t always align with perfect scenarios. Stay vigilant and informed to navigate the stock market successfully.
Stock Market Outlook 2023
The stock market experienced a strong rally towards the end of last year, with the Dow Jones Industrial Average (DJIA) achieving several record closes. Similarly, the S&P 500 (SPX) saw a total return of over 26%, coming just 0.5% shy of its January 3, 2022, record finish. However, stocks have pulled back slightly at the start of the new year.
Expectations of Fed Policy Changes
The rally in 2023 gained momentum as investors factored in a shift in Federal Reserve (Fed) policies towards lower interest rates. While expectations for rate cuts in 2024 have been scaled back by rates traders, there is still a 53.8% probability, according to the CME FedWatch tool, that the fed-funds rate will drop by 150 basis points or more by December.
Treasury Yields Retreat
The benchmark 10-year Treasury yields (BX:TMUBMUSD10Y), which significantly impact the U.S. economy, also retreated. They decreased to around 4% on Tuesday after reaching a peak of nearly 5% in October.
Marks’ Insights on the Financial Markets
In previous statements, Marks has highlighted a “sea change” in financial markets. He observed the rise of interest rates from historically low levels and noticed that investors are no longer solely relying on stocks and riskier investments to meet their overall return targets.
Marks clarified in his latest memo that he does not hold a specific opinion on whether the widely accepted “Goldilocks consensus” is accurate. Regardless, he maintains his expectation that rates will stay within the range of 2% to 4% over the next few years, rather than the range of 0% to 2%.
He stated, “My guess — and that’s all it is — is that the fed-funds rate will average between 3% and 3.5% over the next 5-10 years. If you think I’m wrong, ask yourself whether you’d put your money on a different half-point range.”
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