Oaktree Capital's Marks warns: Signs of a bubble are emerging in the U.S. stock market, but the adjustment threshold has not yet been reached
Howard Marks, co-founder of Oak Tree Capital, warned that the U.S. stock market is in the early stages of a bubble, although the critical point for a correction has not yet arrived. He pointed out that market valuations are high, and investors are 16 years removed from the last severe market correction. He mentioned that the current market conditions are reminiscent of the tech stock frenzy at the end of the 1990s and emphasized the possibility of mean reversion. Marks suggested increasing defensive allocations in investment portfolios, believing that investment-grade credit is more defensive compared to stocks
According to the Zhitong Finance APP, Howard Marks, co-founder of Oak Tree Capital, warned that although the critical point of adjustment has not yet arrived, the U.S. stock market "is in the early stages of a bubble."
The co-chairman of the distressed debt investment management company stated in an interview on Wednesday: "I certainly am not sounding the alarm at this moment. The key is that market valuations are already high." He added that it has been 16 years since investors last experienced a "serious market correction."
Marks pointed out that the current period reminds him of the late 1990s when the market became euphoric about technology stocks, prompting former Federal Reserve Chairman Alan Greenspan to issue a warning about "irrational exuberance."
However, he also emphasized that the market continued to rise for several years before the tech bubble burst. "People have forgotten the lessons of market corrections," Marks said, noting that "mean reversion is very likely to occur." He believes that some technology stocks are "at quite high levels" relative to historical valuations.
In a recent memo, Marks specifically mentioned that since Trump announced tariff policies in April, the stock market has entered a "relief rally." However, he wrote that the persistently high valuations must find a reasonable basis.
He noted that the indicator measuring the ratio of total U.S. stock market capitalization to GDP has also reached a historical high. Due to many companies completing privatization through acquisitions and other firms delaying their IPOs, the issues reflected by this indicator may be more severe than they appear.
In the interview, Marks stated, "Now is the time to add defensive allocations to portfolios; investing in credit is one feasible option compared to stocks."
He acknowledged that bond spreads have narrowed, but they are still more defensive compared to stocks. When asked whether the U.S. is still suitable for defensive investments, Marks compared the U.S. to "a high-priced but high-performance car."
He stated that other regions of the world lack the same vitality or ideal regulatory environment. Although the fundamental investment environment has "slightly deteriorated," the U.S. remains the best investment destination globally
