Home / Analysis / ‘The new, new thing’:  Marks’ autopsy of the bull market

The last few months have several famed investors convinced that the bull market is dead and buried. But how it came to life in the first place bears examining.

“Raging bull markets are examples of mass hysteria,” writes Oaktree Capital co-founder Howard Marks in his latest missive to investors large and small. “At the extreme, thinking and thus behaviour become unmoored from reality. In order for this to occur, however, there has to be some factor that activates investors’ imagination and discourages prudence.”

“Thus, special attention should be paid to an element that almost always characterizes bull markets: a new development, invention or justification for the rising stock prices.”

Some of the things that were entirely new this time – the things that “supercharged market excesses” – were the Special Purpose Acquisition Companies (SPACs); the rise in retail trading, courtesy of discount brokerages like Robinhood; and cryptocurrencies, which might be one of the few pieces of fuel that will survive the conflagration.

While Marks says the memo is not intended as a guide to the future direction of markets, it’s clear from its content that he believes the latest bull run is more or less dead and buried. Today, the average SPAC that “de-SPAC-ed” by completing an acquisition is selling at US$5.25 vs its issue price of $10.00; Bitcoin is off a bit more than half its 2021 high, though thousands of other cryptocurrencies have declined very substantially; and the meme stocks propelled by Robinhood traders are back in the doldrums where those traders found them.

“It’s hard to imagine a full-throated bull market arising in the absence of something that’s never been seen or heard before,” Marks writes. “The “new, new thing” and belief that “this time it’s different” are shining examples of recurring bull market themes.”

But support for these “new, new things” also depends on investor psychology, which tends to swing from “flawless to hopeless” rather than “pretty good” to “not so hot” – as it might in the “real world” that Marks supposes. During a bull market, investors believe that “different, unlikely, and unprecedented things” are sure to work. In times that are less favourable to such thinking due to the wall of worry imposed upon them by exogenous concerns like Russia’s invasion of Ukraine, investors tend to be less convinced by favourable economic news and earnings beats.

“The key lies in the fact that investors are capable of interpreting virtually any piece of news either positively or negatively, depending on how it’s reported and on their mood,” Marks writes. “… While the argument supporting the bull market may have been reasonably likely to hold, investors treated it as ironclad when all was going well. When some of the argument’s flaws come to light, however, it’s dismissed as all wrong.”

A secondary justification for the bull market is the belief that certain businesses are destined for greatness. In bull markets of yore, that’s been the Nifty Fifty – companies like IBM, Dow Chemical, and Xerox – and the telecom and internet upstarts of the late 1990s. These days it’s the FAAMGs (Facebook, Amazon, Apple, Microsoft, and Google) that have provided the fuel for the bull run.

“Notably, these five stocks are heavily weighted in the S&P 500, so their performance resulted in a good overall gain for the index, but this distracted attention from the far-less-impressive performance of the other 495 stocks,” Marks writes. “The performance of the super stocks inflamed investors’ ardor enabling them to disregard worries regarding the persistence of the pandemic or other risks,

“The raging success of the FAAMGs created a luster that reflected positively on tech stocks in general. Demand soared for stocks in the sector and, as is usual in the investment world, strong demand encouraged and enabled supply.”

One “notable barometer” in this particular case is the appetite for IPOs of companies yet to turn a profit.

“Prior to the tech bubble of the late 1990s, IPOs from companies that didn’t make money were relatively rare,” Marks writes. “They became the norm during the bubble, but their number sunk again thereafter. In the 2020-21 bull market, IPOs from unprofitable companies experienced a big resurgence, as investors easily made allowance for tech companies’ desire to scale and biotech companies’ need to spend on drug trials.”

Another theme that Marks tracks is the “race to the bottom” through the effect that bull markets have on the thinking of investors. Asset prices rise, and along with them the fear of missing out; “risk aversion and caution evaporate.”  

“When bull markets heat up and good returns encourage investors’ optimism, the traits that are rewarded are eagerness, credulousness, and risk-taking. In stage three of a bull market, new entrants buy aggressively, keeping it aloft for a while. Caution, selectivity, and discipline go out the window just when they’re needed most.”

“Particularly noteworthy is the fact that investors who are in a good mood and being rewarded for risk tolerance typically cease to practice discernment regarding investment opportunities. Not only do investors consider it a certainty that some examples of “the new thing” will succeed, but eventually they conclude that everything in that sector will do well, so differentiating is unnecessary.”

Of course, to any seasoned investor, this is – or should be – kid stuff. But as Marks notes, the same pattern recurs throughout history. The “new, new thing” rises again and again. But Marks also provides some examples of where they tend to tend up: Salesforce (-37 per cent); Coinbase (-74 per cent); Beyond Meat (-63 per cent); Zoom (-51 per cent); Netflix (-69 per cent)… and so on. Such a list might just fit on a gravestone for this particular bull market.