In his latest memo titled ‘2023 in Review’, Howard Marks argues that the future is uncertain, especially in economics and investing. Most experts are unsure about what will happen with the economy, interest rates, and geopolitical events. This uncertainty is a good thing, because it means people are acknowledging they don’t have all the answers. Even though the future is unpredictable, Marks believes inflation is likely to moderate and interest rates will decline. However, he advises caution and not relying on any one prediction about the future. Here’s an excerpt from the memo:
In my experience, there are two kinds of investment environments: times when people feel they know what’s going to happen and times when they don’t.
Given my skepticism regarding the ability to see the macro future, I think it’s mostly when people say they don’t know what’s coming that they’re likely to be right. Surprises in both macro developments and market behavior are much more the rule than are fulfilled expectations.
For a good example, think back to the fall of 2016. Most pundits were highly confident of two things: Hillary Clinton would win the U.S. presidential election, but if by some quirk of fate Donald Trump won, the U.S. stock market would collapse.
Instead, Donald Trump won, and the S&P 500 soared over the next 14 months, for a gain of nearly 30%. I often cite this as evidence that (a) we don’t know what’s going to happen and (b) we don’t know how the market will react to what does happen.
Most of the people I speak with today tell me they’re unusually uncertain about what lies ahead in terms of the economy, central bank behavior, fiscal management (or lack thereof), politics, and geopolitics, and what it all means for the markets. It’s very healthy that they acknowledge their uncertainty.
And it’s true that the outlook is as unpredictable as ever, if not more so. The economic signals are mixed, and thus the implications for inflation can only be described as mixed as well. And inflation – and thus Fed behavior – is clearly calling the tune.
Consensus thinking has retreated from the belief that there will be six quarter-point rate cuts this year and a year-end fed funds rate around 4%, and the stock market rally has slowed.
Nevertheless, inflation does seem to be moderating, and thus rates are likely to decline from the current restrictive level.
The economy has been performing well – especially when compared with activity in the rest of the world – and doesn’t seem to be displaying the type of excesses that could either derail it or cause it to overheat to the point of requiring Fed tightening. Of course, I caution that Oaktree never bets on my macro views, and neither should you.
You can read the entire memo here:
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