I Missed Rally. Now Odds Are Not In Investors' Favour, Markets May Crash: Howard Marks

Top investors miss rally. Amateurs rake in Big Bucks

Stanley Druckenmiller, who is regarded as one of the top Bosses of Wall Street, sported a glum face at having missed the monster rally.

"I made only 3% while the S&P 500 gave 40%. I have been humbled," he reluctantly admitted, his shoulders slumped, eyes moist.

The same story was repeated by other hot shots of Wall Street such as Warren Buffett, David Tepper, Jeremy Grantham etc.

"The markets are the most overvalued that we have seen in our careers," the trio had said in unison before the monster rally began, advising investors to stay away from stocks.

In sharp contrast to the caution advocated by the luminaries, amateur investors dived into stocks, head first.

They have raked in mammoth gains, even from bankrupt and penny stocks like Hertz, JC Penny, Prakash Steelage, Zentih Birla, Ruchi Infra, Manaksia etc.

The Gurus grudgingly admitted that the amateurs had got the timing perfectly right.

"For all the mocking of Robinhood investors, their timing back into the market looks impeccable, with a significant pick-up in holdings as equity markets bottomed in mid-March," Andrew Lapthorne of Societe Generale fairly conceded.

What led to the rally?

In his latest Memo, Howard Marks has explained the multiple reasons which have led to the monster rally.

One of the prime reasons is the aggressive and no-holds-barred monetary policies of the US Federal Reserve.

“We will not run out of ammunition .... We will continue buying securities for as long as it takes,” Fed Chairman Jay Powell and Treasury Secretary Steve Mnuchin had announced at the peak of the market crash.

This changed sentiments overnight.

"When the Fed buys securities, it puts money into the hands of the sellers, and that money has to be reinvested. The reinvestment process, in turn, drives up the prices of assets while driving down interest rates and prospective returns had a very positive effect," Howard Marks has explained.

Another reason is the low interest rates which have increased profitability of companies and their asset values.

"In all, the Fed created capital market conditions that gave rise to readily available financing, bond issuance at record levels, and deals that were heavily oversubscribed," Marks has pointed out.

He also explained that investors are gripped by a "Fear of missing out" ("FOMO"), which has overridden the earlier fear of losing money.

Are there more bucks on the table for us to feast on?

The million dollar question is whether the rally has more legs and whether we can still dive in and pocket a few bucks.

Howard Marks has advised against it.

He has explained that while the powerful rally is built on optimism; has incorporated positive expectations and overlooked potential negatives; and has been driven largely by the Fed’s injections of liquidity and the Treasury’s stimulus payments, the potential for further gains doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting.

"The fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren’t in investors’ favor," he has opined.

Technical analysts have also warned that Nifty has reached point of "significant resistance"

Leading technical analysts have also cautioned that the scenario is not conducive for fresh investments now.



So, from a fundamental and technical perspective, it is better if we lie low for the moment and see how things shape out!


(Howard Marks with Radhakishan Damani)