In one of his famous “memos” released on Aug. 22, renowned investor Howard Marks (Trades, Portfolio) shared his thoughts and observations on the sudden drop and rebound the market experienced earlier in the month.
The paper, titled “Mr. Market Miscalculates,” began with Marks recapping the famous metaphor for the market that was first introduced by Benjamin Graham. He then reviewed recent events that led to the volatility, starting with the market's performance in 2022, which was “one of the worst years ever for the combination of stocks and bonds” due to the Covid-19 pandemic, soaring inflation and rapid interest rate increases. He wrote:
“Then the mood lightened and, late in 2022, investors coalesced around a positive narrative: the slow economic growth would cause inflation to decline, and that would permit the Fed to start lowering rates in 2023, leading to economic vigor and market gains. A significant stock market rally began and continued nearly uninterrupted until this month. Although the rate cuts anticipated in 2022 and 2023 still haven't materialized, optimism has been in the ascendency in the stock market. The S&P 500 stock index rose by 54% (not counting dividends) in the 21 months which ended on July 31, 2024. That day, Fed Chair Jerome Powell confirmed that the Fed was moving closer to a rate cut, and things appeared to be on track for economic growth and further stock market appreciation.”
However, that same day, the Bank of Japan announced the biggest increase in its short-term interest rate in over 17 years, which shocked the market.
Using a number of cartoons to help illustrate his point, the guru went on to explain what was behind the market's volatility, saying it can de driven by things such as investors' emotions, cognitive dissonance and expectations. As such, he warned that investors need to temper their enthusiasm.
To conclude, Marks noted that it is an investor's job to “take note when prices stray from intrinsic value and figure out how to act in response.”
Read Marks' full memo here.
