A top 3% fund manager warns a 'multi-year bear market' is coming with stocks in the biggest momentum swing of his 45-year career
- Bill Smead warns of a potential market downturn, urging a shift to value stocks.
- Smead cites rapid market momentum and persistent inflation as key concerns for investors.
- His Smead Value Fund has outperformed 97% of its peers over the last 15 years.
Investors have enjoyed sunny days over the last two-and-a-half years thanks to a strong economy and enthusiasm around artificial intelligence.
But at some point, it’s going to rain, warns Smead Capital Management founder Bill Smead.
Smead styles himself as a modern-day Noah of the financial world, drawing on the biblical tale of Noah’s Ark. By that he means he’s continuing to lean into value stocks as the growth factor remains frothy.
“Everything we have studied about common stocks, including The Intelligent Investor by Ben Graham, A Short History of Financial Euphoria by John Kenneth Galbraith, and from listening to the wise words of Charlie Munger and Warren Buffett for decades leads us to believe that we must build a common stock portfolio which will float when the multi-year bear market creates a waterfall of selling among magnificent growth stocks and passive S&P 500 Index owners,” Smead wrote in a recent letter to investors.
Smead’s downcast outlook stems in part from how fast this rally has unfolded.
“It is the most all-encompassing momentum market of my 45 years in the investing business,” he wrote.
Smead Capital Management
The prospect of persistent inflation also concerns Smead. He said the mismatch between commodity supplies and the high demand for them will keep prices rising, as will ongoing wage increases.
“Ask the dock workers or Boeing machinists what a long-term union contract that raises your income 8.5% per year compounded means,” Smead wrote. “Ask the U.S. Postal Service why they are raising last-mile delivery prices by 60% and forcing UPS to cut Amazon deliveries in half!”
Inflation has proved sticky since coming down from its 2022 highs, sitting consistently in a range near 3%. President Donald Trump’s tariff threats have incited fears of a further reignition of inflation.
Rising prices have historically been bad news for stocks when they’re highly expensive, particularly those of the growth tilt. Right now, stocks are at some of their highest valuation levels in history as far as the Shiller cyclically-adjusted price-to-earnings ratio goes.
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However, some investors have also started to worry that economic growth could start to slow enough to send the economy into recession. Falling yields on the 10-year Treasury note, a risk-free asset, are one signal that investors are seeking safety. Yields on bonds fall when their prices rise. For the moment, however, jobless claims have remained virtually flat.
One might expect a value manager like Smead to have a gloomy forecast in a growth-driven market like this. But there’s no denying Smead’s eye for picking winners. According to Morningstar data, his Smead Value Fund (SMVLX) has beaten 97% of similar funds over the last 15 years.
He also crushed the S&P 500 in 2021 and 2022 before AI exuberance sent the benchmark index soaring. In 2021, Smead returned 37% compared to the S&P 500’s 26.9%. And in 2022, when the S&P 500 fell 19.4%, SMVLX was down only 4.4%.
Smead’s current top-five holdings in order include Simon Property Group (SPG), American Express (AXP), Macerich (MAC), Merck (MRK), and DR Horton (DHI). All of them have weightings above 5%.