Author: Smead Capital Management

Due to the pandemic, there is a sense of permanence on Wall Street to what has transpired. This permanence focuses on the changes that we have seen in the recent five months in our daily lives. These changes include shopping online versus shopping in-person, getting takeout versus sitting in a restaurant and working from home instead of talking sports around the water cooler with our colleagues. The question at hand for this argument of permanence is whether it is truly permanent or if it is temporary. The definition of permanent is, “lasting or intended to last or remain unchanged indefinitely.” So, to us this begs the simple question: will our lives remained changed indefinitely?

In the time since COVID-19 hit the economy and stock market, there has been three phases. First, the question was ‘when’ will the economy return to pre-COVID normal? Next came ‘sooner or later’? Recently, we have moved to ‘will the economy ever come back’? For long-duration investors like us, what are the investment implications in where we are now in a U.S. stock market with many securities priced for ‘never’?

When you are in a financial euphoria episode, like the one we are in currently, it is hard to visualize the impact it has when it breaks. Historically, it is the leading cause of stock market failure. We thought it would be helpful to discuss the secondary impact of the euphoria on common stocks. What do companies not in the center of the euphoria do when the fever breaks? How much portfolio adjustment do you need to do to protect yourself? What are the investment implications of owning common stocks whose prices have been inflated by mania, but are not in the center of the storm?