uploads/2018/07/The-Fed-3-1.jpg

Howard Marks: This Is the Single Biggest Equity Market Risk

By

Updated

Howard Marks on a key risk

Howard Marks said at the 2018 Delivering Alpha Conference on July 23 that the Fed’s hawkish stance is the single biggest risk for the equity market (SPY).

After maintaining ultra-low interest rates (TLT)(SHY) for a decade, the Fed has been continuing its gradual rate hike process since December 2015. It already hiked its key interest rate for the seventh time between December 2015 and June 2018, each time by 25 basis points. Now the federal funds rate is within the 1.75%–2.00% range.

Article continues below advertisement

Still, there’s some expectation among market participants that the Fed will hike its key interest rate twice more in 2018. The faster rate hike process slows economic activity, as borrowings become costlier for corporates and individuals. Higher borrowing costs also slow a company’s capital expenditure as well as consumer spending.

Marks said, “Higher interest rates will present lots of problems. It will make it hard for companies to service their debt. It will make it hard for the government to service its debt. And fixed income instruments will present competition to equities.”

In the next part of this series, we’ll look at Marks’s views on emerging markets.

Advertisement

More From Market Realist