Billionaire investor Howard Marks is warning that the easy times in the stock market are likely over. In a recent interview, Marks talked about a quote “sea change” that is taking place as we speak that will fundamentally change the economy and the way people invest. Make sure to stick around to the end of the video because Marks provide details on how he recommends people invest to take advantage of a once in 40 year opportunity.
The US stock market has been on an amazing run for the better part of the last 4 decades. As we can see in this chart here, the S&P 500 has risen from roughly 100 at the start of 1980, all the way to a high of nearly 4,800 at the start of 2022. This means that $1,000 invested in the stock market in 1980, would have turned into a whopping $48,000 by the start of 2022, not even including dividends. If you include reinvested dividends, that $1,000 would have turned into a staggering $122,000. With these types of impressive returns, the last 40 years was arguably the golden era of the stock market.
During this time period, amazing companies were founded. The average publicly traded company became more profitable. American corporations grew as international markets opened and business became a global affair. All of these factors helped contribute to the extremely impressive returns the stock market generated. However, according to Howard Marks, all of those factors paled in comparison to what he considered the dominant driver of stock returns over the last 4 decades…. Declining interest rates.
Take a look at this chart here of the Federal Funds Effective Rate, a proxy for interest rates in the US economy. As we can see, interest rates peaked in the early 80’s with the fed funds rate hitting nearly 20%. From 1980 to 2010, interest rates continued to fall with each passing decade. That was until rates simply couldn’t go down any further. The fed funds rate was lowered to 0% in response to the great financial crisis and spent much of the following decade at that level. 40 years of constantly declining interest rates created a massive tailwind for the stock market. Let me explain. The value of any type of asset, whether it’s a stock, bond, or piece of real estate, is based on the cash it will generate for you as the owner, discounted back to the present day using an appropriate interest rate. I know that definition may sound complex but it’s actually incredibly simple.
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