Market veteran Howard Marks said higher rates and safer yields are signs of the third major market shift in his 53-year investing career. “We have moved from the underperforming world of 2009-21 to a fully profitable world, and may be more so in the near term,” Marks said in a new note to clients on Tuesday. “Investors can now earn solid returns from credit instruments, meaning they no longer have to rely as much on riskier investments to meet their overall return goals.” Oaktree Capital Management’s Marks notes have gained a wide following on Wall Street, and even legendary investor Warren Buffett has said he reads them regularly and always learns something from them. Marks noted that the first two market transformations he witnessed were the boom in private equity and the drastic rate cuts of former Federal Reserve Chairman Paul Volcker. “The market characterized by easy money and bullish borrowers and asset owners disappeared; lenders and buyers now had better cards. Credit investors were able to demand higher yields and better protections from creditors,” Marks said. The Fed has deployed a series of aggressive interest rate hikes since March in an effort to reduce inflation from around its highest levels since the early 1980s. Many fear the tightening could bring down the ‘economy, which is still recovering from the pandemic, towards a recession. The 76-year-old investor expects the prime rate over the next few years to be more likely to average 2% to 4%, rather than the near-zero rates that fueled the bull market of the past decade. “There probably won’t be very stimulative rates for the next few years, barring a severe recession that we need to bail out of,” Marks said. The investor warned that because of the big change, investments that have performed well in the past could start to underperform in the coming years. “If you accept that the environment is and may continue to be very different than it was over the last 13 years, and most of the last 40 years, it should follow that the investment strategies that performed best during those periods may not be the ones to beat in the next few years,” Marks said. “That’s the sea change I’m talking about.”
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