What’s behind the crazy market rally? A billionaire investor explains

The Fed’s rate cuts are boosting stocks -- and the FAAMG crowd is exceptional.


August 10, 2020

The S&P 500 is up ~50% since its March low, and back near its all-time high.

The mind-blowing rally is taking place as the economy saw its worst quarterly GDP contraction in 70+ years.

WTF is going on?

A popular (but unsatisfactory) answer is: “the Fed is pumping the markets.”

For a more thorough explanation, the billionaire investor Howard Marks recently published one of his famous “memos.”

We broke it down

The S&P 500 traditionally trades at a price-to-earnings (P/E) ratio of 16x. But with interest rates near zero, the P/E ratio should trade at a 50% premium (24x) or higher (all things being equal, a higher P/E = higher stock price).

In layman’s terms: the Fed’s interest-rate cuts are boosting stock valuations.

And the FAAMG stocks (Facebook, Amazon, Apple, Microsoft, Google), which make up 15-20% of the entire market, are exceptional, Marks says.

FAAMG is going HAM

On average, the FAAMG stocks are up 36% on the year, but the median S&P 500 stock is down 11%. The bull argument says the giants’ rise can continue because…

  • … they have scale and tech advantages protecting them from the business cycle’s swings.
  • … they benefit from corona-fueled shifts to digital.
  • … they’re growing faster than behemoths of the past.
  • … they have huge cash piles.

So where does that leave Marks? He’s not totally convinced by the bulls’ argument, but says it has “obvious merit.”

If making sense of the market comeback still doesn’t make sense, Marks says, listen to some Charlie Munger wisdom: “It’s not supposed to be easy. Anyone who finds it easy is stupid.”

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