In his latest memo titled Further Thoughts on Sea Change, Howard Marks believes that investors are still optimistic about the future of the stock market, despite the recent challenges caused by inflation and interest rate hikes. However, he also believes that this optimism may be misplaced, and a lessening of optimism will throw some sand into the financial gears. Here’s an excerpt from the memo:
I’ve been thinking lately about the fact that being an investor requires a person to be somewhat of an optimist. Investors have to believe things will work out and that their skill will enable them to wisely position capital for the future.
Equity investors have to be particularly optimistic, as they have to believe someone will come along who’ll buy their shares for more than they paid. My point here is that optimists surrender their optimism only grudgingly, and phenomena such as cognitive dissonance and self-delusion permit opinions to be held long after information to the contrary has arrived.
This is among the reasons why they say of the stock market: “Things can take longer to happen than you thought they would, but then they happen faster than you thought they could.” Today’s sideways or “range-bound” market tells me investors possess a good amount of optimism despite the worries that have arisen. In the coming months, we’ll find out if the optimism was warranted.
The positive forces that shaped the 2009-21 period began to change around 18 months ago. The higher inflation turned out not to be transitory. This brought on interest rate increases, concern that a recession would result, some resurrection of worry over the possibility of loss, and thus insistence on greater compensation for bearing risk.
But while most people no longer see an outlook that’s flawless, few think it’s hopeless either. Just as optimism abetted a positive cycle in those 13 years, I believe a lessening of optimism will throw some sand into the financial gears in a variety of ways, some of which may be unforeseeable.
In this latter regard, it’s essential to acknowledge that since we haven’t lived through times exactly like the years that lie ahead – and since changes in the economic/financial environment limit the applicability of history – we’re likely to encounter surprises. And if the environment is less favorable, the surprises are likely to be on the downside.
You can read the entire memo here:
Further Thoughts on Sea Change – Howard Marks
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