Howard Marks on the Post-Election Markets

In last week’s Barron’s, Oaktree Capital’s Howard Marks reflected on the presidential election and offered a wealth of insight regarding both its complexities and its multi-layered and far-reaching implications.

With specific regard to the markets, Marks posed the question: “How could the expectation of a Clinton victory make stock prices rise, and then the reality of her defeat make them rise further?” He explained: “The market often fails to act rationally in the short run, primarily because of the role played by people in determining its course.”

In his lengthy essay, Marks delved into a range of economic and political issues making the following observation about the financial markets:

“Trump’s statements regarding business and the economy contain some real positives and are the best part of his platform…if he and his administration are up to the task of putting them into practice. However, some of his promises may test the limits of what can be accomplished under the limitations imposed by economic reality.”

He cited the following negative aspects of the Trump victory:

  • The President-elect’s “disdain” for Janet Yellen, and the resulting possibility that “Fed independence will be reduced”;
  • Trump’s stance on international trade pacts, the threat of imposing import duties on goods made in China and Mexico, and the resulting possibility of trade wars;
  • The possibility that his “unconventional positions on things such as climate change and defense treaties bode ill for international relations in general”.

Equity investors like inflation because it “pumps up profits,” Marks wrote, adding that bond investors dislike it because it raises interest rates and lowers the value of the bonds they hold. “But,” he argued, “the two can’t go in opposite directions forever.”

Regarding the market outlook, Marks offered a comment from Stanley Druckenmiller (founder and former chairman of Duquesne Capital) who has long harbored a negative view. In a CNBC interview, Druckenmiller said he’s “quite, quite optimistic” about the U.S. economy following the election of Donald Trump, adding that he is “hopeful as I’ve been in a long time.”