The main theme for investors right now is how the surge in bond rates made stocks less attractive. This had the S&P 500 (SPY – Get Rating) heading lower which compelled me to write recent commentaries about a term we should all get used to: Rate Normalization.
I am not the only investor fixated on this topic. Howard Marks, the famed money manager from OakTree, believes this theme has multi year effects on the investment landscape. That is a topic we need to dig into further today.
Spoiler Alert: It does darken the appeal of stock investing going forward. The good news is that those aware of the Sea Change can chart a course to outperformance. And that is exactly we will discuss below in today’s Reitmeister Total Return commentary.
The simplified version of the current investment chain reaction goes like this:
Bond Rates Up > Stocks Down
However, that is just the current dynamic. That is why Howard Marks has gone in depth on the topic in his latest letter to investors: Further Thoughts on Sea Change.
It’s a lengthy read. So let me boil it down for you by expanding on the above chain reaction:
Bond Rates Up > Lower Corporate Borrowing > Slower Economic/Earnings Growth > Stocks Less Attractive > Bonds More Attractive
Why are stocks less attractive?
Because earnings growth is the main catalyst for stock price appreciation. Meaning that once stocks become fully valued in terms of PE…then really the only thing that makes sense to move prices higher is earnings growth. If that is muted…so too is upside potential.
Further, if bond yields are higher, then investors have a very attractive, lower risk alternative to achieve decent rates of return. This dynamic has already been set into motion given the dramatic rise in rates since the spring and accelerated the past couple months.
Note that stocks being less attractive does not equal unattractive. And does not mean bearish.
In essence, it says that investors need to throw out the playbook from the last 40 years as interest rates drop from historically high levels in the early…
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