market folly

It's no secret that Oaktree Capital's Chairman Howard Marks pens some of the most-read memos on Wall Street (Warren Buffett even reads them).  So while Marks' last memo talked about high yield bonds, his newest missive is entitled 'The Outlook for Equities'.


Valuing Stocks Today


The Oaktree founder says that earnings yield is a better measure of stocks' long-term potential (earnings yield is the flipside version of the P/E ratio, i.e. E/P).

Marks points out that the P/E ratio today is around 16 and the earnings yield is around 6.25%.  Comparing the yield ratio to historical figures, he argues things are favorable today.  However, he cautions:

"The problem with basing pro-equities arguments on the yield comparison is that most of equities' current attraction on that basis comes from the lowness of interest rates."


The Bull Case For Equities

Marks highlights a few different reasons to be bullish on equities, such as: mutual fund inflows have been low (and outflows have stopped) and stocks aren't highly valued.  His most intriguing point, however, lies in investor behavior:

"A move upward can be powered by a switch from the fear of losing money to the fear of missing opportunity.  When attitudes are moderate and allocations are low, it doesn't take much."

So the main question here is, are investors now more concerned about downside risk or missing out on the rally?

Marks feels there are three stages of a bull market

1. Few people begin to believe things will get better
2. Most investors realize improvement is actually underway
3. Everyone's sure things will get better forever

He thinks we're currently in the first half of stage 2.

Embedded below is Howard Marks' latest memo, 'The Outlook for Equities':




For more from Oaktree, be sure to also check out Howard Marks on high yield bonds today.