I don’t intend to use this platform to prognosticate on the markets next swings, but I want to post a quick follow up on the market status. Two weeks ago, Howard Marks, co-founder of Oaktree Capital released an excellent memo which concluded with a discussion of the current state of US Equities. It puts a similar conclusion in better terms than I did.
A few of the key points from the conclusion:
“In the mid-1970s I was fortunate to happen upon one of the first of the time-worn pearls of wisdom that contributed so much to my education as an investor. It described the three stages of a bull market:
the first, when a few forward-looking people begin to believe things will get better,
the second, when most investors realize improvement is actually underway, and
the third, when everyone’s sure things will get better forever.”
“But the study of market history only makes us better investors if it teaches us how to assess conditions as they are, rather than in retrospect.”
“So now we have a somewhat improved fundamental environment, a generally more optimistic group of investors, and stock prices that are a fair bit higher. No one should say the likelihood of improvement is entirely unrecognized today, as would have to be the case for this to still be stage one. I think that existence of improvement is generally accepted, but that acceptance is neither extremely widespread nor terribly overdone. Thus I’d say we’re somewhere in the first half of stage two. Pessimists no longer control market prices, but certainly neither have carefree optimists taken over.”
This analysis could just as well describe the Australian market and puts in better terms the sentiment that I described in the last post. The market is definitely heating up, but does not yet look to be into ‘irrational exuberance’ territory. The somnolent Bull has stirred, but hasn’t begun its charge. There are objective coincident/leading indicators such as margin lending, or average analyst estimates that we can use to support this view. However, since ‘market sentiment’ is by its nature a psychological phenomenon many of the best gauges will be subjective, based on a reading of prevailing news/analyst reports/cocktail party banter.
If Stage II of a bull market is the current situation then the best response for investors is to be cautious of being swept up in the rising tide which will lift all boats. We must maintain the same rigorous standards for investment selection and guard ourselves against any thoughts that ‘this time its different’. It almost never is.
This is a brilliant memo that is best read in its entirety, and can be found here: