Investor Bill Smead Sits on the Sidelines Amid Bearish Market Sentiment

In a surprising turn of events, renowned investor Bill Smead has opted to refrain from buying into the current stock market downturn, a departure from his usual strategy of capitalizing on bearish sentiment. Smead, founder of Smead Capital Management, expressed concerns about the ongoing market conditions, indicating that the unwinding of a significant market bubble is far from over.

Key Takeaways

Bill Smead, a value investor, is not buying into the current market downturn.
He cites high equity valuations and household stock exposure as major concerns.
Smead predicts a prolonged market adjustment, potentially lasting years.
He is currently investing in energy stocks, anticipating a recession.

Current Market Sentiment

Historically, bearish investor sentiment has prompted Smead to seize opportunities in undervalued stocks. However, he now believes that the market is facing deeper issues. He stated, "The psychology of both the market and the economy are very bearish, and that would normally be a reason for us to be very positive. The problem is we have to unwind the largest mania of my career."

Smead's career began in 1980, and he has since built a reputation for successfully navigating market fluctuations. His Smead Value Fund has outperformed 96% of similar funds over the past 15 years, according to Morningstar data.

Indicators of Market Weakness

Smead points to several indicators that suggest the market has not yet hit bottom:

High Equity Holdings: Household equity holdings as a percentage of total household balance sheets are at record highs as of Q4 2024.
Market Cap to GDP Ratio: The ratio of total stock-market capitalization to GDP remains near recent highs. Smead notes that this ratio would need to drop to around 80% to align with historical norms, which would require a significant market decline.

Predictions for the Future

Smead anticipates that the market may need to fall by as much as 50% to reach a more sustainable valuation level. He believes this adjustment will not be a quick process, stating, "It will be a multiple-year phenomenon of getting to that ratio."

Recent market volatility has been influenced by concerns over tariffs and their potential impact on inflation and economic growth. The Bank of America's Global Fund Manager Survey indicates that a record number of fund managers are planning to reduce their stock exposure, reflecting widespread pessimism.

Strategic Shifts in Investment

In light of these market conditions, Smead has shifted his investment strategy away from high-tech stocks, which he views as overvalued. Instead, he has focused on sectors he believes will perform well during a potential recession, such as:

Energy Stocks: Seen as a defensive investment, especially as prices have dropped due to trade tensions and increased production.
Mall REITs: Real estate investment trusts that focus on retail properties, which may benefit from a rebound in consumer spending post-recession.
Homebuilders: Companies involved in residential construction, which could see increased demand as the market stabilizes.

Despite a challenging year in 2024, where his fund only rose by 3.5%, Smead remains optimistic about the long-term potential of his current investments. He recalls that during the recession of 2008, Americans reduced gas consumption by only 2%, indicating that energy demand remains relatively inelastic even in tough economic times.

As the market continues to navigate these turbulent waters, Smead's cautious approach serves as a reminder of the complexities involved in investing during uncertain times. Investors will be watching closely to see how these predictions unfold in the coming months.