Add Howard Marks to the list of notable investors who believe the market comeback has gone too far

Billionaire investor Howard Marks joined a growing chorus of notable investors in warning that the market rebound has gone too far given the uphill battle of developing a cure for Covid-19 and its economic impact in the meanwhile.

Specifically, Marks believes that markets will eventually face more turbulence once the Federal Reserve’s unprecedented, but nonetheless temporary support mechanisms fade, according to a Bloomberg News report.

“Can the Fed keep it up forever?” Marks said in a Bloomberg “Front Row” interview. “Those of us in the markets believe that stocks and bonds are selling at prices they wouldn’t sell at if the Fed were not the dominant force. So if the Fed were to recede, we would all take over as buyers, but I don’t think at these levels.”

The U.S. central bank in March embarked on a historic campaign to support the economy and financial markets through a variety of asset purchases and an announcement of two corporate-credit facilities with $750 billion in spending power.

The Fed’s coup de grace came on April 9, when it announced a $2.3 trillion lending program that will extend credit to banks that issue Paycheck Protection Program loans and purchase up to $600 billion in loans issued through the Main Street program to medium-sized firms.

Optimism about the central bank’s efforts grew Sunday night, when Fed Chairman Jerome Powell spoke of the colossal efforts it’s already undertaken and its continued commitment to sustaining U.S. growth.

“There’s a lot more we can do” to help the economy, Powell told CBS’ “60 Minutes” in an interview that aired Sunday. “We’ve done what we can as we go. But I will say that we’re not out of ammunition by a long shot. No, there’s really no limit to what we can do with these lending programs that we have.”

It’s those types of comments and mammoth monetary policies that have reassured some investors that U.S. business will find its footing and, slowly but surely, return to normal. That sentiment, combined with new hopes over a Covid-19 vaccine, helped catapult U.S. stocks higher on Monday with the Dow Jones Industrial Average up 850 points, or 3.5%, and on pace for its best day since April 6.

But skeptics — both of the Fed’s potency and of the market rally — remain. Of paramount concern to current market bears is how long it could take for corporate profits to return to growth.

Chart of the S&P 500's price-earnings ratio over the past 20 years

Marks says he expects a slow and halting recovery from the coronavirus pandemic and told Bloomberg that “there will be plenty” of debt defaults and bankruptcies as companies run out of cash in the months ahead.

He made similar comments to CNBC in April, when the Oaktree Capital co-chairman said there was a jarring disconnect between the stock market and the reality the world was facing amid the Covid-19 outbreak.

“We’re only down 15% from the all-time high of Feb. 19,” Marks said on April 20. But “it seems to me the world is more than 15% screwed up.”

“People are traumatized, and not just because of the performance of their stocks,” Marks said at the time. “Everybody’s life is hugely changed.”

As of Friday, with 90% of the companies in the S&P 500 having reported results for the first calendar quarter, earnings are down 13.8% year over year, on pace for the worst slide in profits since 2009. The forward 12-month price-to-earnings ratio, a common gauge of how “expensive” stocks are based on their income, is 20.3; that’s well above the 5-year average of 16.7.

Others, such as Appaloosa Management founder David Tepper, agree that the market may be set for more rocky trading ahead. The hedge fund manager told CNBC on Wednesday that the current stock market is one of the most overpriced he’s ever seen, only behind 1999.

Before Wednesday’s sell-off, it was “maybe the second-most overvalued stock market I’ve ever seen,” Tepper said on CNBC. “I would say ’99 was more overvalued.”

Fellow billionaire Mark Cuban said on Thursday that he thinks the market is overvalued thanks to uncertainty surrounding consumer spending.

“I think it’s almost impossible to predict where consumer and corporate demand is going to come from,” he said. “And because of that, it’s hard to create a valuation for businesses.”

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