Yes, the S&P 500 is just off all-time highs after a 36% gain from October to July. Yes, revenue growth is strong. But Smead is skeptical about how long the good times can last.
In an interview with Business Insider on Wednesday, Smead said we’re in one of the biggest bubbles in market history.
“We see today’s circumstances as the fourth great financial euphoria of the last 100 years: 1929, 1969, 1999 and now,” said Smead, who manages the Smead Value Fund (SMVLX). The fund has outperformed 99% of similar funds over the past 10- and 15-year periods, according to Morningstar data.
There are many data points that support Smead’s view. He mentioned one in an Aug. 6 note: the percentage of stock holdings that make up households’ portfolios. Right now, it’s at an all-time high.
Smead Capital Management
Or take two famous assessment measures, for example.
The cyclically adjusted Shiller price-to-earnings ratio, which is a 10-year moving average of stock valuations, surpasses levels in 1929 and trails only its highs of 2021 and 1999.
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And the so-called Warren Buffett Index, or total market cap to GDP, sits just below all-time highs.
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The stretched nature of the current market makes Smead certain of one thing – the S&P 500 will underperform over the next decade or longer. While valuations are poor predictors of short-term market performance, they tend to be the most important factors in deciding where stocks are headed over the long term. According to a Bank of America analysis, 80% of the market’s performance over a 10-year period can be attributed to starting valuations.
“We are absolutely convinced that people will not make money in the next 10-15 years in the S&P 500 except for trading purposes,” Smead said.
“History bears that out,” he continued. “From ’64-71 the Dow went nowhere. And from 1999 to 2009 the S&P 500 made no money.”
But Smead has also become bearish on the market’s near-term outlook, largely because of the weight of technology stocks in the index. With the technology sector’s weak earnings recently, the sector has endured its worst period since 2022. From June 10 to August 7, the Technology Solutions Sector Fund SPDR ( XLK ) fell 17%.
Given the sector’s 31% weight in the S&P 500, Smead thinks its underperformance will continue to drag down the index, causing more investors to sell the index, further hurting tech stocks, etc.
“Selling begets more selling and feeds off of itself. Major stocks begin to underperform, which drags down the S&P 500 Index, which in turn causes the index to sell off. Index selling drags down larger-cap stocks, which adds more legs to selling the index.”
Moreover, inflation is “rooted” in the economy, he believes, and once the Federal Reserve starts cutting interest rates in an effort to stave off a recession, prices will start rising again more quickly. That will hurt the market’s valuation, which currently stands at 21 times earnings, well above its long-term average of 14 times.
Smead stocks are betting
Smead’s views put him in line with ultra-low-key money managers like Jeremy Grantham and John Hussman, who both believe stocks are in a bubble and will deliver poor returns over the long term.
While Smead may turn out to be right over the next decade-plus — a length of time in which his track record gives him credibility — it’s hard to say whether his short-term skepticism about the market will work. The S&P 500 is up 49% since the end of 2022 as bears continued to warn of a downside.
Stocks suffered from a sustained sell-off for several days earlier this month after the July jobs report came in cooler than expected, raising questions about the health of the economy. But the market has rebounded in recent days and investors will wait for more data to confirm whether or not the deterioration in the labor market is substantial.
If the stock does indeed continue to sell off, Smead has some ideas for taking advantage of the downside. First, he likes homebuilders, which he believes will benefit from lower mortgage rates as the Fed prepares to cut its overnight lending rate for the first time since the start of its aggressive tightening cycle. walking in 2022.
Two in particular that Smead is betting on are DR Horton (goat) AND Lennar (LEN).
Second, low interest rates would boost demand and could cause inflation to re-emerge, which would be good for oil stocks, Smead said. He has positions in Occidental Petroleum (OXY) AND Apache (APA).